Much the way students get a grade that shows how well they did in a class, consumers get a grade based upon how wisely they use credit. Their credit score is determined by three major agencies who track consumers’ credit: TransUnion, Equifax, and Experian. Each bureau determines how they will score a consumer, so it is possible for one person to have three different credit scores. Because the agencies have agreed upon scoring guidelines that are more or less standard, the credit scores of one person should be fairly close to each other. However, in reality, some consumers have found that their credit scores vary by 40 or more points, depending on which agency is reporting.
The exact formula that determines a credit score remains a mystery. None of the agencies have publicly disclosed exactly how they determine a credit score. However, it is known that there are several factors that are taken into account. Probably most important is a person’s track record in terms of paying their bills on time. Having a lot of late payments, charge offs, and accounts that were placed with a collection agency can severely damage credit. Also affecting credit is how much of it a person has available. If a person has $10,000 of available credit through their credit cards, but has made $9,000 worth of charges on those cards, their credit score could be impacted. Having a lot of available credit can raise a person’s credit score. The length of time a person has had an account also plays a positive role in terms of determining a credit score. The longer a person has had an account open and in good standing, the more it increases a credit score because it is a sign of a person’s stability.
What is considered good in terms of a credit score?
Credit scores can range anywhere from 350 to 800 points. The higher the score, the better. The average American’s credit score is around 723. Opinions vary somewhat on what exactly is a good credit score, but there is a general consensus on what ranges of credit scores mean.
A score in the 800s is considered to be an excellent credit score. It is estimated that only 13% of people in the United States have a credit score over 800. Obtaining a mortgage, getting a car loan, or opening a line of credit is generally no problem for these people. The risk of them defaulting on a loan, or even not paying a loan back on time, is very, very low. Because of the nominal risk, banks and other lenders are generally happy to lend to someone with a credit score in the 800s.
How to interpret a credit score in the 700s is a bit more challenging. Generally, a score of 770 or above is considered to be nearly as good as a score in the 800s. These people generally have no problems getting loans, and are seen as low risk. Those with scores between 730 and 770 are viewed favorably by lenders, and can generally qualify for loans at the lowest rates. Consumers who have scores in the lower 700s can qualify for loans, but may have to pay slightly more in interest than those with the best credit.
A score in the 600s is considered to be a marginal score. People who have scores between 620 and 700 can usually qualify for loans, but they will definitely be at a higher interest rate than people with a score in the upper 700s. Qualifying for a large loan, such as a mortgage, will be harder for people with a credit score in this range. They may have to come up with a larger down payment, or purchase a home with a lower asking prince, if they find themselves in this credit score range. A score of 620 is considered the minimum score someone must have to qualify for a mortgage. Federal agencies, such as the FHA, will not insure loans for people who have a score of less than 620.
A credit score in the 500s is very poor. People who fall into this category will have trouble qualifying for any type of loan. Depending on where there score falls in the 500s, they may not be able to get a car loan or even a credit card.
Is a credit score absolute?
No. A person’s credit score changes all the time. As the continue making on time payments, pay down their credit cards, and develop more of a credit history, their score will rise. Depending on the individual’s situation, their credit score may reflect improvements in less than a year. By making better choices, people can often raise their credit score significantly in 18 to 24 months.
How lenders view credit scores is also dependent on the economy. When economic times are good, lenders are generally willing to lend money to people with lower credit scores. This is because with more business in general, they feel that they can balance risky credit decisions with more sure things. In bad economic times, even people with fairly good credit can find it hard to get a loan.
