What is a Good Credit Score & How to Achieve it?

Consumers often wonder to themselves, what is a good credit score? After all, having a good credit score can make it easier to get personal loans at a lower interest rate. Although credit scores range from 300 to 850, in 2022, Experian reported that the average American has a credit score of 714. This is considered a good score since a credit score between 700 and 749 is considered good by the credit bureaus.

Key Points:

• A good credit score ranges between 700 and 749.
• The best thing you can do to improve your credit score is to pay your bill on time.
• Your credit score is built on five key components: paying your bill on time, keeping utilization under 30%, the length of your credit history, only applying for credit when you need it, and ensuring you have a balanced mix of credit.
• Check your credit report often to ensure it is accurate, and file a dispute if you find erroneous information.

What Can You Do With Good Credit?

What benefits can you expect from having a good credit score, considering that a score between 700 and 749 is generally considered good?

• Get more favorable interest rate: with a low credit score of under 690, you could pay at least 13.5% interest on a personal loan, mortgage, car loan, or new credit card. But with a good credit score, you are more likely to be approved for a loan with an interest rate of 10.73% to 12.5%. That lower interest rate could save you as much as $5,000 over five years on a $20,000 loan.
• Increased chances of getting a credit card: a good credit score typically means that you are demonstrating creditworthiness via good borrowing habits. This means you are paying your bills on time every month, managing your credit card utilization, and paying attention to the amount of debt that you take on. All of this makes you more favorable in the eyes of a potential creditor.
• Borrow higher amounts: before giving you a loan, creditors want to make sure you don't take on more than you need and that you can pay them back. A good credit score signals to them that you are a worthy credit risk.
• Easier approval by landlords: landlords want to make sure you are going to follow through on your promises to take care of the property and pay them on time every month. Most landlords will check your credit history, and feel more confident when they see a good credit score.
• Less need for a security deposit with certain purchases: the higher your credit score, the less likely you will need to pay a security deposit. Think of a security deposit similarly to collateral. The creditor wants something to hold on to in the event you don’t follow through with your payment terms. 
• Better chances of getting a job: your good credit score can even help you land a job. A good credit score and a positive payment history indicate to the employer that you are reliable and responsible. So, pay your bills on time and increase your chances of landing a great job.

A 750 credit score, or even anything above 700, can make a big difference when making a purchase, getting a credit card, and more. For example, a good credit score can provide perks and rewards such as points or cash back. So, the more you use your card (and manage your payments and utilization) the more points or cash back you can earn. You can then exchange those points for travel offers, merchandise, or more.

How Good Credit Scores Impact Interest Rates for Different Types of Loans

Your credit score can directly impact the interest rate you could get on a mortgage, car loan, personal loan, or credit card. Let’s take mortgage interest rates as an example.

The difference of a 5.697% interest rate vs. a 7.286% interest rate can save you a lot of money over the course of a 30-year mortgage. Consider a $300,000 30-year fixed rate mortgage with $60,000 put down as a down payment. At 7.286%, your monthly payment could be $2,054 or more. But with all things held the same and a 5.697% interest rate, the monthly payment could drop to $1,741. That’s a difference of $313 per month and that money could be used for utilities, home improvements, or even be put into your savings account.

When taking out a loan of any kind, be sure to shop around for the best interest rates. Though various creditors may have similar options, they do vary. 

How to Get a Good Credit Score

Getting a good credit score takes a little bit of art and a lot of science and there is no secret formula. However, any credit-building consumer needs to be aware of the five road rules of the credit rating road.

• Never miss a payment: and always pay on time.
• Pay more than the minimum due: All creditors will have some minimum due each month. As a borrower, you are responsible for paying at least that amount. But paying only the minimum due can get you into trouble in the long term because you’ll end up paying more interest and potentially growing that utilization. So whenever you have a bit of extra cash to spare, pay a bit more and watch your balance drop.
• Don’t spend anywhere close to your credit limit. This is called utilization, and the rule of thumb is never to use more than 30% of your total credit limit.
• Develop a long credit history. This can be tricky with young or new borrowers. Just know that the longer you have credit, the stronger your credit score can be (as long as you follow the other rules of the road).
• Only apply for credit when you need it. It can seem lucrative to sign up for all those retail store offers. But you’re better off waiting to apply for credit until something important comes up.
• Pay attention to your credit mix. Having too many credit cards or multiple personal loans doesn’t look too good to future creditors. 
• Keep an eye on your credit reports. The Consumer Financial Protection Bureau makes it easy for consumers to get a copy of their credit report. All three credit bureaus (Experian, Equifax, and TransUnion) also have programs designed to help consumers stay on top of their credit reports.
• Keep credit lines open after they are paid off. Closing out a credit card or credit line might seem intuitive once you have paid it in full. However, keeping it open can help you maintain your account history and credit utilization, even with a low or zero balance.

How Long Does It Take To Get a Good Credit Score?

The longer you have good credit and take steps to work towards an excellent credit score, the better your credit score will be. But this doesn’t mean you can’t develop a good credit score shortly out of the gate. It takes about six months to build a credit score and a bit longer to get a good one. 

To build good credit, take the following steps:

• Don’t fall behind on your payments
• Avoid maxing out your credit card
• Keep accounts open vs. closing them when you pay them off (this helps you build history)
• Avoid applying for more credit than you need

What to Do if Your Credit Score Drops

It’s important to know that credit scores fluctuate - all the time. So don’t be surprised if you check your credit score one day and see an excellent credit score of 760, and the next week, your credit score falls into the good range at 720. 

Know that your credit score reflects time and changes based on your payment history, the current balance on your card, etc. For example, if you owe $5,000 on your credit card and make a $3,000 payment one month, you may see your credit score go up shortly after the creditor reports to the bureau that your balance has gone down.

However, sometimes your credit score can drop, and sometimes it is more than you want it to. If your credit score drops, here is what you should do:

• Check your credit reports to ensure the information contained is accurate. If it is not, follow the instructions on the credit report. You will likely need to file a credit report dispute.
• Pay down any overutilized credit cards (remember, the magic number is 30%).
• Don’t panic, and continue to pay your bills on time. You will be able to rebuild your credit score.

Understanding Credit Score Ranges

Credit scores range from 300 to 852, which is the standard in the financial services industry. However, it is essential to understand that not all credit scores are the same. 

FICO Credit Score Ranges

Each of the three main credit bureaus has a slightly different take on credit score ranges.

For example, the FICO score range is as follows.

• Poor = <580
• Fair = 580 - 669
• Good = 670 - 739
• Very Good = 740 - 799
• Excellent = 800+

Lenders use FICO scores to assess your creditworthiness. The higher the score, the more likely your credit application will be approved. And FICO is the organization that developed the proprietary algorithm that scores borrowed on their creditworthiness. 

VantageScore Credit Score Ranges

Another credit score that is widely used is the VantageScore. The backstory here is that Experian, Equifax, and TransUnion worked together back in 2006 to create the VantageScore to compete against FICO’s proprietary scoring system. As a result, a good VantageScore is slightly different than a good FICO score.

According to the U.S. News World & Report, VantageScore 3.0 ranges from 300 to 850, just like the FICO score range. However, the credit score ranges within are a bit different. The VantageScore credit ranges are as follows:

• Very Poor = 300 - 499
• Poor = 500 - 600
• Fair = 601 - 660
• Good = 661 - 780
• Excellent = 781 to 850

Lenders can choose whether or not they want to use the FICO scoring system or the VantageScore to determine creditworthiness.

What Factors Impact Your Credit Score?

Remember those five tips we provided earlier that tell you the secrets to getting a good credit score? Let’s break that down a bit further. To acquire a good FICO credit score, look at the following:

The percentages listed represent the weight that FICO gives to each of those factors.

• Payment history = 35%
• Amounts you owe = 30%
• Length of your credit history = 15%
• New credit you apply for = 10%
• Type of credit you use = 10%

As you consider the steps you can take to build good credit, remember the weight of each facor. 

Additional Tips To Building Your FICO Credit Score

The most important thing you can do to work towards an excellent credit score is to pay your bills on time. 

Pay attention to what you owe: avoid carrying a balance of more than 30% of your credit limit. So, if you have a credit limit of $10,000, keep your balance under $3,000.

This all said, just because you have a credit limit of $10,000 doesn’t mean you should spend that $3,000. 

Be aware of the interest you will have to pay: the interest and your minimum required payment to ensure you can manage it each month. And paying just the minimum, even if you don’t spend much more, isn’t always the best strategy.

Similar factors go into the VantageScore. So, if you are following the recommendations provided to build a good FICO score, you’ll inevitably build a good VantageScore too.

Average Credit Scores by Age, State, and Income

It’s important to understand that everyone has different incomes, credit card balances, loan histories, years of credit, and more. For these reasons, credit scores can vary from person to person. However, to help you better understand credit scores, here is some helpful information about average credit scores by age, state, and level of income.

Average Credit Scores by Age

Since the length of history is an important factor in determining one’s credit score, it stands to reason that the older you are, the more likely you are to have better credit. For example, those between the ages of 18 to 24 had an average FICO score of 679 at the end of the second quarter of 2021. Conversely, those aged 76 or over had an average credit score of 760.

Average Credit Scores by State

According to American Express, Minnesota tends to have the highest credit scores. As of April 2021, Minnesota’s average credit score was 742. Vermont followed at 738 and then Wisconsin at 736. Credit scores in the south tended to be lower than the rest of the country, with the lowest average credit score in Mississippi at 681.

Average Credit Scores by Income

Lower-income people were more likely to have a credit score of around 658. Higher incomes are more likely to have a credit score rating of 774.

Final word 

In summary, understanding how to build good credit and the benefits of a good credit score is critical if you want to buy a house, lease a car, or even open a credit card account. The keys to building good credit and achieving a 750 credit score or higher are paying your bills on time, keeping your credit card balances low, being thoughtful when opening new credit lines, ensuring you have a mix of credit, and having the patience to build a credit history. Paying attention to these factors will be sure to increase your likelihood of a good credit score, if not an excellent one.