What Is a Good Credit Score Anyway?
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- By Clay Wyatt
- January 19, 2014
Wouldn’t it be great if lenders used common sense instead of credit scores to determine your “creditworthiness”? The lender could simply say, “Here’s someone who has a good income, no debt and pays 99 percent of her bills on time – let’s give her a loan.” Instead, they rely heavily on credit scores, leaving consumers one illness or other financial disaster away from years of borrowing struggles.
Regardless, credit scores are an important financial reality in the modern world. Most homebuyers need a mortgage and plenty of new car buyers require an auto loan. College students need to borrow money to get through school — and the list goes on.
With this in mind, you’ll want to know what a good credit score is so you can gauge your chances of securing a loan with favorable terms, if you can get one at all. What is a good credit score, anyway?
The Good Credit Score Range to the Worst
FICO credit scores, which are the mostly widely used at present, range from 300 (worst credit score) to 850 (best credit score). As you may expect, your chances of securing a loan at a favorable rate (or qualifying for a loan at all) increase with a higher credit score.
Those at the high end have had very little (if any) debt-related problems. However, those at the bottom end have probably had six cars repossessed and been struck by lightning a few times in recent months.
What is Considered a Good Credit Score?
Estimates vary, but the general consensus is that any score in the high 600s to low 700s is a “good” credit score. Scores in the mid-700 range are “very good” and anything above that is “excellent.”
Supporting the consensus, at least to an extent, credit scoring giant Experian believes, “A score above 700 usually suggests good credit management.” So, for the sake of sanity, let’s say anything above 680 is good, as this is a figure commonly cited by credit experts.
That said, some consider scores in the low-600s as good, so you may still qualify for a decent loan if you fall within that range. Below that, though, you’ll find borrowing to be very difficult.
Why is Anything Above 680 a Good Credit Score?
A group of credit elites sit around a table once a year, hold hands and laugh like Dr. Evil. They turn the lights out, light a fireplace, stir a cauldron and throw darts at a board with numbers ranging from 300 to 850. This year, the first dart to stick landed on 680.
The above is obviously not true. However, there is no clear reason why a given number represents a “good” credit score to a particular lender, while another may not.
One explanation may be that 60 percent of credit scores fall between 650 and 799. With that in mind, those at the lower end of this range – or beneath it – may be seen as a poor credit risk while those above 680 may be seen as a similar risk to their peers, making them “good” by comparison.
Limitations of Credit Scoring
Critics often cite that credit scores do not accurately assess a person’s financial risk. In fact, according to ratings agency Fitch, the credit score gap between those who paid home-loans on time and those who stopped paying was a mere 10 points in 2006.
To illustrate, financial guru Dave Ramsey has repeatedly stated his credit score is a whopping zero. Basically, he doesn’t borrow money, so his credit score has simply gone away. Meanwhile, according to The Richest, his net worth is $55 million. In other words, if he tried to obtain a loan to purchase a $10,000 car, he’d be turned down, even though he has enough wealth to purchase 5,500 such vehicles out-of-pocket!
And let’s not forget Warren Buffett who, according to Forbes, has a net worth of $58.5 billion. In 2008, Fortune Magazine reported that his credit score was 718 – not much higher than the current average of around 692. So, his ability to repay a mortgage loan would be seen as “good,” not “excellent,” even though he could purchase about 350,000 homes out-of-pocket.
Basically, if you have a low credit score, it doesn’t necessarily mean you are incapable of paying a loan responsibly. Sadly, though, it will still hinder your ability to borrow.
Like it or not, your credit score is key to securing loans to pursue your financial dreams. So, even with the mentioned limitations to credit scoring, the reality is you’ll face significant hurdles if you attempt to borrow with a low credit score.
While FICO scores range from 300 to 850, 680 or above should be your goal. A majority of borrowers have around or above this number, meaning lenders will favor them over you if you fall below it.