If you don’t know any better, your credit score can seem like a completely random combination of numbers that makes no sense and has no real connection to your financial reality. However, that statement couldn’t be farther from the truth. Your credit score is exceptionally important and can have a huge impact on your financial life. Different scores, of course, mean different things. As such, here’s a look at what a different score will look like, and what it means.
What is a FICO credit score?
Your credit score is a three-digit score that is calculated based on your financial history. It takes into account a variety of factors, like your history of on-time payments, credit utilization rate, recent credit card requests, and more. Your FICO credit score is somewhere between 300-850.
While the FICO credit score is one of the most commonly accepted ones, there are other scores as well, with slightly different methods of calculation. These include VantageScore, which also calculates your credit on a range of 300-850.
What is considered a good score?
The category breakdown is as follows:
- 800-850: Exceptional (21% of Americans fall into this category)
- 740-799: Very Good (25%)
- 670-739: Good (21%)
- 580-669: Fair (17%)
- 300-579: Very Poor (16%)
As you can see from the above, a score of 670 or higher – currently held by 67% of Americans – is considered a good score.
What will a good score or higher get you?
Generally speaking, a score that falls into the category of “good” or better is good news for your financial future. According to Experian, only 8% of people who fall into the category of Good are will become “seriously delinquent” in their future financial history. This means that lenders view people in this category as a low financial risk, and are thus more likely to extend them good credit rates or loan opportunities.
This is because of the way your FICO Score is calculated. The most influential factor in the calculation of your FICO Score is your payment history and the total debt you owe. If you have a positive history in these important areas, you are likely to have a higher score, making borrowers much, much more willing to lend you money.
This, of course, can open up a whole new array of financial opportunities to you. It can make it easier for you to borrow more money for a new house, or to take out a small business loan. It virtually guarantees that you will be able to take out a loan for a car or get a new credit card that has an array of perks, like reward bucks. It also means you’ll be able to phone a bank or credit card company and potentially negotiate for better rates. Believe it or not, your credit rating may even extend to your car insurance rates, as your credit rating factors into your insurance risk score. As such, you may be able to get better car insurance rates if you have higher credit.
The crux is this: Banks and credit card companies love lending money to people with Good or higher credit, as it means they are very likely to get their money back – with interest.
Conversely, a credit rating that is Fair or Very Poor may limit your borrowing options. Remember, this means that you are a riskier credit risk. As such, borrowers may be less willing to loan you money, give you a line of credit, or even do business with you at all. They may ultimately be willing to give you a loan, but it will be at a higher interest rate in order to compensate for the greater risk that exists with lending you money. You may have a difficult time getting a mortgage or renting a house, and if you have a history of evictions, they may be impossible. A financial institution may also require additional fees or financial insurance in order to protect them from financial loss. This, of course, may dramatically limit your financial options. Unfortunately, there is an old axiom: Being poor is expensive. Having a lows credit rating is a good example of the truth behind this expression.