What is a good Credit Score and How is it determined?

What is a good Credit Score and How is it determined?

The difference between having a good credit score and a bad one can mean tens of thousands of dollars in interest and even impact your ability to get a loan. You’d think what determines a good score would be pretty clear-cut.

But that’s not the case. Banks and other lenders designed credit to be complicated to keep you in the dark.

Why is Credit so Complicated?

For starters, each of the big 3 credit bureaus (Equifax, Experian, and TransUnion) may have different information on file for your credit history. In some cases, this could be due to mistakes, but it’s just as likely to be because lenders are not obligated to submit your payment history or balance information to any of the bureaus, much less to all three. Because of the lack of lender requirements, even if all of the bureaus used exactly the reporting structure and the same exact scoring system (which they don’t), there’d still be differences in your score and report across bureaus.

To further complicate things, on top of the data translations of your credit history, the three bureaus also use a number of different scoring algorithm systems.

With all of the differences and variations, it’s the lender who actually determines what they consider to be a good score. And even then, the lender may have their own in-house, custom scoring model – a score only the lender would have access to. It’s complicated, but if you know the 5 Factors that are used to determine your score, and you know how to translate your credit reports and find and disputes errors on them, you will be better at managing your credit and improving your scores.

How is my Credit Score Calculated?

Their are Five Factors That Determine Your Credit Scores:

  • Payment History (40%)
  • Outstanding Debt/Credit Utilization (35%)
  • Credit Age (10%)
  • Account Types (10%)
  • New Activity (5%)

Payment History (40%)

How well you pay your bills has a major impact on your credit scores. You can expect lower scores if you have late bill payments, accounts in collections or bankruptcies, especially if they are recent. Tip: Paying on time is the single most important thing you can do to affect and protect your scores.

Outstanding Debt/Credit Utilization (35%)

A balance on credit cards or loans doesn’t automatically make you a high risk to lenders. But significant amounts owed on multiple accounts and pushing your credit limits can be a red flag that could cost you in the long run. If you have a combined $10,000 of credit card debt, with one credit card carrying a $4,000 limit that is maxed out and another credit card with $6,000 in charges and a limit of $8,000, that would hurt your score a lot more than if you had $10,000 in debt spread across a few cards with a total credit limit of $25,000.  Tip: Don’t use more than 30% of your total available credit.

Credit Age (10%)

This is the age of your credit history, and older is better. It shows lenders how experienced and responsible you are about taking on debt and paying it back. Tip: Don’t be so quick to trade in your old cards for new ones, even if you have paid down the balance to zero. Keeping your older cards active and paid on time, even with small charges is a wise choice.

Account Types (10%)

The types of accounts you have matters. People with the strongest credit scores often have a mix of Revolving Accounts (credit cards, retail, and gas cards) and Installment Accounts (a mortgage, auto loan, or student loan) in good standing. Tip: Have a mix of credit accounts, all paid on time, to show lenders your ability to manage different types of debt, and shows that you are actively using credit in several aspects of your life and finances.

New Activity (5%)

This includes new accounts and new credit inquiries on your credit reports. A hard inquiry is an inquiry that occurs when a prospective lender checks your credit report to make a lending decision. Hard inquiries can slightly lower your credit score and will typically stay on your report for two years. Hard inquiries can include: applying for a credit card, mortgage, car loan or lease. A soft inquiry occurs when a person or company checks your credit report as a background check, like when a mortgage lender preapproves you for a loan, or a company’s HR department runs a check on you after a job interview. Checking your own credit score online also counts as a soft inquiry. Soft inquiries can occur without your permission, but don’t worry – they won’t affect your credit score in any way. Inquiries into your credit from lenders is normal. But alarms sound if you have lots of new inquiries and new accounts show up on your reports in a short time frame. Tip: Avoid applying for, and opening, multiple new types of credit accounts all at once.

What’s A Good Score?

According to Experian, good credit management is a credit score 700 or above. However, the average U.S. credit score as of 2016 was a 659. Averages for your state, region, and age may vary drastically, and can also play a part in what types of interest rates you are available to obtain for a loan or mortgage in your area. For many lenders, a credit score above 700 will land you solid interest rates and lending terms. Until fairly recently, to receive the best rates and terms, a consumer had to have a score of 720, but as lending practices have become more restrictive, the new “best” is closer to the 750-760 range.

“Probably two or three years ago, a 720 was a pretty good score,” said Steve Ely, president of North American Personal Solutions at Equifax. “Today’s 760 is what a 720 used to be.”

The Cost of Errors on Your Report

A 2012 FTC study found that about 1 in 4 of Americans have at least one major error on their credit report.

Your credit scores are directly affected by what’s on your reports. And your reports are only as accurate as the information provided to the credit reporting bureaus by your creditors. Creditors make mistakes and reporting errors do happen… often. Some errors that are seemingly minor (for example, an account that doesn’t belong to you) or serious (a false delinquency) that go undetected and undisputed drastically lower your credit scores.

Errors that adversely impact your scores can make it extremely difficult for you to get loan approval, and will cost you thousands of dollars in higher interest payments, and even raise your car, health, or life insurance premiums. On average, a person that corrected a single error led to a 31 point jump in their credit score. The bottom line is, errors on your report cost you money.

The Bottom Line

Your scores determine your interest rates and insurance premiums. People in debt tend to stay in debt because they can’t get out of the hole that their sky high interest rates put them in. If you have good credit, you can save your self $50,000-$150,000 dollars if you factor in the difference in interest accrued on home payment and 2 car loans over a 30 year period, as well as the lower car and health insurance premiums.

Lending agents at banks and car dealerships will take advantage of you if you are not aware of your credit score and any errors on your credit report. That is why it is crucial to have documented your credit scores and reports from all 3 bureaus on a monthly basis while you are applying for loans or carrying any major debt balance. Try FreeScore360 powered by ScoreSense for FREE today, and get access to one on one help with a trained credit specialist to go over your credit scores and reports line by line with you and answer any credit questions you may have. If you’re not COMPLETELY satisfied with ScoreSense, simply cancel and return here as needed.