Understanding Credit Score Ratings & Ranges - A Complete Guide
Your credit score is a vital part of your financial history and is used by lenders and other organizations to understand how much of a risk you are when it comes to financial matters. Understanding how your credit score is made up, and the typical ranges and ratings can help you get insight into your creditworthiness and allow you to make improvements to improve your financial standing.
This article provides an in-depth exploration of the various factors that make up an individual's credit score (FICO score), together with the various actions that can improve and worsen credit scores. The article answers questions like why credit scores matter, how credit scores can impact people, what average credit scores are and the importance placed in each area when calculating someone's credit score.
You and your credit rating
Your credit score comes from several distinct but related areas that together make up your credit history; these areas are combined together to calculate your overall score. Although the exact calculation varies from country to country, the principles in this guide relate to the FICO system in the United States. Credit agencies in other countries use similar methods to calculate credit scores for people applying for a loan, credit card, mortgage or consumer credit.
This guide highlights the main areas and the factors in each one, that together give you your score, including:
- What a credit score represents
- Why your credit rating matters
- How your credit score will affect you
- The main factors that influence credit ratings
- Typical credit scores
- Examples of credit score ranges
Benefits of understanding your credit score
There are several benefits to spending the time understanding your credit report and score:
- Find out how likely financial institutions and organizations are to lend money to you
- See how various parts of your credit history influence your overall score
- Decide how to improve your credit score and the main areas you should focus on
What your score represents
Your credit score brings together your credit history and uses a formula to provide a single score that indicates how good you are likely to be at managing your credit and repaying any money that is loaned to you.
It gives lenders an exact prediction of the risk involved in giving you a loan. Credit scores range from the 300s to around 900, with higher being better; the majority of people have scores falling in the 600s and 700s.
There is no one 'centralized' credit score; there are three main credit scoring agencies in the US (Experian, Equifax and Transunion) and they all use slightly different calculations. This means that your score can vary by a small amount between agencies.
Why a credit score matters
Credit scores are used by almost all lenders to decide if the risk of lending money to you is worth taking; in other words, if you borrow money from them, your score shows how likely it is that they will be paid back.
Credit scores are used to determine your creditworthiness, and are part of the decision that lenders make when giving you a credit facility, for example:
- Credit cards - American Express, Discover, Mastercard and Visa - This is a 'revolving' credit that gives you a credit limit or facility that you can use
- Loans - Borrowing money from banks and other institutions, normally at a fixed interest rate for a fixed period of time; these are typically paid off in installments
- Consumer credit - Credit provided via store cards, for mobile phones, purchase of cars etc. Normally provided through the store or dealer that you purchase from, they are actually managed by various financial institutions
- Mortgage - A loan to purchase a property, normally secured on that property. Most mortgages are taken out over the long term, typically between 20 and 30 years
Additionally, insurance companies and employers may also view your credit score to find out how financially responsible you are.
How a good, average or poor credit score will impact you
- A good credit score generally means that you will receive a better deal in terms of interest, financing and repayment options
- An average credit score will mean that you get a typical deal in terms of interest and repayments
- A poor credit score generally means you will be charged more interest and may have harsher repayment terms
The main factors that make up your credit score
Each of the following areas has a major impact on your overall FICO score;
- Payment history - 35%
- Amount of Credit Used - 30%
- Length of Credit History - 15%
- Types of Credit Used - 10%
- Recent Searches for Credit - 10%
- Other factors that impact your rating - Variable
Payment history - 35%
Payment history makes up over a third of your credit score. It represents how reliable you are in making regular payments to reduce your outstanding debt.
- Improved by - Making payments on time, every month; paying bills on time or ahead of time
- Worsened by - Missing one or more payments or not paying on a regular basis
Amount of Credit Used - 30%
This is the second largest factor in deciding your credit rating. It represents the amount of money that you owe (your outstanding balance vs. the amount you originally borrowed and/or your credit limit. In other words, the more you could borrow, and the less you owe, the better.
- Improved by - Having a higher credit limit and not using it (e.g. having a credit card with 10% or less of your credit limit as an outstanding balance)
- Worsened by - Having one or many balances at close to or over your credit limit
Length of Credit History - 15%
The amount of time that you have had credit has an impact on your credit score. Generally, the longer your credit history (i.e. the amount of time that you have had credit for), the better.
- Improved by - Having a longer credit history
- Worsened by - Not having a credit history or just a very recent one
Types of Credit Used - 10%
Being able to properly manage several different types of credit is a positive sign for lenders and shows that you are more financially responsible.
- Improved by - Having a variety of credit types, e.g:
- 'Revolving' credit - Credit available to you via credit cards
- 'Consumer' credit - Credit provided by a store, dealer and the like
- 'Installment' credit - Credit that you get through a fixed term loan
- 'Mortgage' credit - Credit that you obtain for purchasing property
- Worsened by - Having very few (or no) different types of credit
Recent Searches for Credit - 10%
A large number of searches for credit (e.g. inquiring or applying for credit) will show on your credit record.
- Improved by - Not making large numbers of searches for credit in a short period of time
- Worsened by - Lots of searches or applications for credit over a short period
Other factors that impact your rating
There are other factors that will negatively impact your credit score, the main ones being:
- Money owed because of a court judgment
- Money owed because of a tax or other lien
- Having one or more recently opened consumer finance credit accounts
- Filing for bankruptcy
- Having a collection agency involved in getting money from you
Credit scores explained
What is your credit score at the moment?
Credit score ranges
Credit scores can range from a low of 300 to a high of around 850, and good credit scores are generally considered to be 680 and up, whilst a poor credit score would be 619 and below.
- 37% of people had a FICO credit score of between 750 and 850 in 2012
- The median FICO score in 2006 was 723, and was 711 in 2011
Credit scores and ranges are generally grouped as follows:
- Score of 720 or more - Excellent
- Score between 680 and 719 - Good
- Score between 620 and 679 - Average
- Score between 580 and 619 - Poor
- Score between 500 and 579 - Bad
- Score less than 500 - Terrible
Score of 720 or more - Excellent
A credit score in this range will provide you with the best interest rates and repayment terms on loans and credit of all kinds.
Score between 680 and 719 - Good
If your credit falls in this range, you can still expect to be accepted for the vast majority of credit and will get you good deals on interest and repayment terms, including acceptable mortgage rates.
Score between 620 and 679 - Average
With a score in this range, you can expect fair mortgage and loan terms, although not the best; you might want to consider improving your score.
Score between 580 and 619 - Poor
Any money that you borrow will very much be on the terms of the lender. This means that you can expect higher than normal interest rates and finance charges. If you are looking for a loan for a car, you cannot have a score lower than this.
Score between 500 and 579 - Bad
A credit score in this range means that any money you borrow will be costly for you. From higher than normal interest rates to harsh repayment terms, this will significantly impact the affordability of mortgages, consumer credit and other loans.
Score less than 500 - Terrible
If your credit score is less than 500, you will find it very difficult to get any kind of financing or to borrow money at all. If you can get a loan, expect very high interest charges and punitive repayment terms and other fees.
Which part of your credit rating would you most like to work on?
Understanding how your credit score is calculated is a vital first step in taking steps to improve it, but once you know how it is made up, you can identify the areas you need to focus on. With care and diligence, anyone can understand and make practical changes to improve their scores.