You have seen the commercials and heard the radio jingles, so by now you know that a good credit score is important. But what is a good credit score? Generally, anything above 700 is considered a good FICO credit score.
But that is not the end of the story. The reality is that a good credit score doesn’t guarantee a loan or mean that you are in good financial shape. A good credit score just gives the lender another piece of information to help determine your credit worthiness. Your ability to get a loan depends on many factors, including your credit report, your credit history, amount of available credit, credit utilization, and other factors. Many lenders even use specific types of credit scores for certain loans. For example, the FICO 8 score is often used by mortgage companies to determine one’s ability to qualify for a mortgage.
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What is a Good Credit Score Range?
Your credit score is determined by a proprietary mathematical formula. There are many different versions of credit scores, but the most commonly referenced is the FICO credit score, which is considered the industry standard. Your credit score is based on a weighted formula which includes your payment history, amounts owed, age of credit history, recent loans, and the types of credit you have. The FICO credit scores range from 300 to 850 and a good credit score range is considered 700 – 850. Here are more credit score ranges and their ratings.
FICO credit sore ranges:
- FICO credit score range: 300 – 850
- Good credit score: above 700
- Average credit score: 680 – 700 (depending on source)
- Poor credit score: Below 620
Why You Need a Good Credit Score
The FreeCreditReport.com commercials want you to believe you need a good credit score to drive a nice car and pick up chicks. Unfortunately, that’s not quite true. A good or bad credit score doesn’t guarantee a loan or necessarily prevent you from getting a loan. A good credit score will make it easier to be approved for a loan, allow you to have more available credit, and qualify you for lower interest rates when you are approved for a loan. And low interest rates can make a HUGE difference over the life of a loan.
How a good or bad credit score affects interest rates. Loans are available to almost anyone, even people with a poor credit score. But the terms and size of the loan will vary widely. The difference will come in the form of the required down payment or the interest rate you will have to pay. Let’s look at some examples of how good and poor credit scores will affect your payment structure on a mortgage, then on an auto loan. There is a substantial difference in monthly payments between high and poor credit scores, and the payments over the life of the loan should be enough to convince you that a good credit score is valuable!
Effect of Credit Score on 30 Year Fixed Mortgage Rates
The score ranges and interest rates below come directly from the MyFICO website. There are three examples given for credit score ranges and interest rates, one is for auto loans and the other compares credit score and interest rate ranges for 15 and 30 year mortgages. The example below is from the 30 year fixed mortgage at $300,000:
| FICO® score | APR | Monthly Mortgage Payment |
|---|---|---|
| 760-850 | 4.645% | $1,546 |
| 700-759 | 4.867% | $1,586 |
| 680-699 | 5.044% | $1,619 |
| 660-679 | 5.258% | $1,658 |
| 640-659 | 5.688% | $1,739 |
| 620-639 | 6.234% | $1,844 |
Comparing good credit mortgage rates and bad credit mortgage rates. Using the numbers above, you will notice there isn’t a big difference in the monthly payment from the top credit score to the second tier credit score range of 700-759 (remember anything over 700 is generally considered a good credit score range). Once you start dropping into the lower tier credit score ranges, you will see a large monthly difference in your payments. But thinking in terms of monthly payments can be an expensive way to think, especially when you consider that this is for a 30 year mortgage.
Even with the best credit score, making minimum payments on a 30 year mortgage means paying $256,564.15 in interest over the life of the loan. Paying 6.234% interest over the life of a 30 year mortgage equates to paying $363,851.12 in total interest. To put it another way, that monthly difference of $298 equals a difference of over $107,000 over the life of the loan.
How Your Credit Score Affects Auto Loans
Using the same concept as we used above, let’s examine the how your credit score range affects your monthly auto payments. The MyFICO website references a 36 month fixed rate auto loan for $25,000.
| FICO® score | APR | Monthly Auto Payment |
|---|---|---|
| 760-850 | 5.715% | $757 |
| 700-759 | 7.354% | $776 |
| 680-699 | 9.380% | $799 |
| 660-679 | 13.196% | $845 |
| 640-659 | 18.039% | $904 |
| 620-639 | 18.680% | $912 |
Comparing good credit auto loan rates and bad credit auto loan rates. As you can see, the monthly difference between the good credit score range and a poor credit score range is $155, or over $5,500 for the life of the loan.
What is bad credit score?
Have a poor credit score? Credit scores under 620 are often considered sub-prime loans, and come with more risk to the lender. Borrowers with credit scores in this range often pay substantially higher interest rates. If you fall below the sub-prime loan cutoff limit, it may be best to try and improve your credit score before applying for a loan. You may find it easier to obtain a loan and the terms will likely be better.
Remember, not all is lost. As we mentioned above, you can almost always find someone to give you a loan if you need one. You will see a difference in the terms of the loan, though. You may be required to pay a larger down payment or higher interest rates to get the loan you are seeking.
Your credit score is important
Like it or not, your credit score plays an important role in your ability to obtain a loan, the amount of available credit you can carry, and the interest rates you will pay. If you are considering applying for a loan in the near future it is probably a good idea to know your credit score and try to improve it before applying for the loan.
Get your credit report and free credit score. If you are interested in monitoring or improving your credit you can get instant access to your 3 credit scores with GoFreeCredit.com.
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{ 16 comments… read them below or add one }
You’re entitled to one free credit score a year that shows the areas that affect your credit, both positively and negatively.
Another good resource is creditkarma.com… check it out, it grades your credit and tells you what to do to improve.
It’s actually one free credit report from annualcreditreport.com. You can read more about that topic here: free credit report from annualcreditreport.com.
Most companies don’t give away a free copy of your credit score unless you sign up for one of their credit monitoring trials. CreditKarma.com gives an approximate score based on factors from the credit reporting agencies, but it is not the FICO credit score. However, it can give you a good idea if you don’t need to know your exact score.
One way to avoid a bad credit score is to use credit sparing at best. The only thing I finance now is real estate and no I am not rich. It just take learning how to save. Regardless of how good your score is, those bills must paid.
Paying bills = paying interest
interest=lost buying power!
On 5-23-2010 I checked my three credit scores from Transunion, Experian, and Equifax and found my scores range from 828 – 848 although they listed my credit grade as a “B” and not an “A”. Does this mean the scale has changed and these scores are now only average? They showed a scale ranging from 501 – 990 with anything above 900 an “A”. From what I recall, an 850 score was at the top of the scale previously.
Mike, the FICO credit score range goes up to 850. It seems like you checked your credit score using the VantageScore credit scoring system. VantageScore is a credit score system run by the three major credit bureaus. It utilizes the same data that the FICO score uses (based on your credit report), but hte score ranges are different. Most lenders still use the FICO system, so be sure to check with your lender before applying for a loan.
i have my son as a authroize user on some credit cards how does thst effect his credit score and if i take him off will that effect his score? thank you
Hey John,
If your son is just an authorized user of your credit card it doesn’t affect his credit at all. If he is trying to build credit himself he needs to open his own account. The only person’s credit score that can be affected is your’s.
Not true I was able to build a fico score of 770 as an authorized user on my parents account just by purchasing and paying off what I had purchased without any other ways of building credit such as other cards or other bills
Jim, that is not correct. A credit card is assigned to one person’s social security number and can only be reported on that person’s credit report. It would be illegal for them to report that credit card on your credit report whether they reported favorably or not. Don’t believe me? Ask for a copy of your credit report and see for yourself… that card will not be listed on your report. Your credit score went up for other reasons, not from being a signer of your parent’s credit card.
Credit scores make a difference, even if you aspire to live debt free. Even employers are using credit scores to screen potential applicants these days.
Very true. Insurance companies and cell phone carriers also use your credit score as an indicator.
Pat’s comment hits on exactly what I think about every time I read an article about credit scores. It’s called a CREDIT score for a reason, that reason being that it’s simply an indicator of how reliable of a person you are. I for one am all for employers checking credit scores, as I think it typically speaks volumes about a person’s character, like how trustworthy and responsible they are and how well they honor their obligations.
My only caveat to this opinion would be a situation where a person has never missed a payment and has been financially responsible, but just doesn’t have much of a credit history.
I owned a company that hired MANY folks with bad credit, and many turned out to be great employees, I don’t see how a credit would determine how many people would fair in a job. It all depends on the job, finance, accounting, banking, I totally understand why your credit is interest, if you can’t handle your own money how can you handle a customers.
Many employers are checking your credit to see if you have any convictions, liens, garnishments which are on your public records section. Insurance companies in my opinion use credit scores to jack up your rates, how does your credit score bear on your driving record, your home owners insurance ???
If you are debt free, it is incredibly easy to have a high score! Keep four cards with high limits that you use once or twice a month and pay those card off every month, then you are good to go!
Glendon,
I’ve never owned a business with employees before, so obviously you have more of an insight than I do.
I would just think that if I were interviewing people to work for me and represent my company, I would want to find out as much as possible about that person (especially if it’s for some type of financial position like you mentioned), and I really think that a person’s credit history says at least a little something about a person’s character.
I agree about how easy credit-building is with no debt. Just as long as the balance is paid off every month and not forgotten about.
I recently applied for a refinance on a mortgage loan. The credit scores were as follows:
Transunion 820
Equifax 701
Experian 678
why such a difference in scores????
The only blotch on my credit is a $19 disputed bill from trash service.
I’m not sure, Leon. I would get a credit report from each of the bureaus (you can get one free credit report each year from each of the bureaus). Then compare each report to the others and make sure they are all accurate. It’s possible there is some erroneous or outdated information on one or more reports which is bringing your score down. You should also contact the credit bureaus to inform them about the bill that is in dispute. It’s possible that is bringing your score down, and having that removed could improve your credit score. Best of luck.