What Is a Good Credit Score?

Your credit score is a three digit number that lenders use as a shortcut to determining your credit worthiness. It is also called the FICO score on occasion, because the Fair Isaac Corporation created a proprietary formula used for determining your FICO score. Although exact methods of determining a FICO score are unknown, the ratio used to determine the score and the scale used to evaluate scores has been released.

The credit score scale ranges from 300 to 850. What is a good credit score? Generally, scores over 700 are considered either very good or excellent. Different lenders have different cutoff points for what they consider "very good" and what they consider excellent. Some lenders might reserve prime rates for individuals with scores over 720, while others want the score to be over 740 or 750 before they offer the best deals.

Scores between 680 and 699 are considered good credit. 650 is usually considered the average, so scores between 620 and 679 are "average" or "decent." While you might not necessarily be offered the best deals and the highest credit line, you won't be relegated to secured cards, denied loans or faced with "subprime" or very high interest rates.

Scores below 620 are considered poor credit. You will usually still be able to get loans or credit in some situations, but the interest rates will be much higher. If your score is below 499, you may be unable to get any types of loans at all and/or may be relegated to subprime lenders and secured credit cards, if you are granted a loan at all.

What Is a Credit Score?

A credit score is a three digit number on a scale from 300 to 850. Numbers at the very low and very high end of the scale are rarely, if ever seen.

Lenders use this three digit number as a shortcut. Instead of performing traditional "underwriting" when granting a loan, which involved looking at income and a number of other factors, lenders can now look at this three digit number and get a good idea of whether you are a good credit risk or not.

Lenders thus use this three digit number to decide whether to extend credit to you and how much. Credit scores are used when you apply for almost any type of credit, from a credit card in a store to a major credit card to a car loan, student loan or mortgage loan.

A good, or high, credit score results in a higher credit limit and/or lower interest rate or both. The interest rate is the amount you are charged for the privilege of borrowing money. It is often expressed as an annual percent, which means you are charged a percentage of the total amount you borrow. The credit limit refers to the maximum amount you are permitted to borrow.

A poor credit score, on the other hand, can result in denial of an application for credit. It can result in lower credit limits and higher interest rates, meaning it costs you more to borrow money. For a car or mortgage loan, the difference in interest rates between a good credit score and a bad credit score can mean thousands - or even hundreds of thousands- of dollars over the life of the loan.

How Is Your Credit Score Determined?

The three major credit bureaus (Equifax, Experian and TransUnion) collect data from all your creditors on your borrowing behavior. If you apply for a card, charge up a balance or make a payment, the creditors report it to the credit bureaus who put all this information on your "credit report."

Using the information from the credit report and a proprietary version of the FICO formula, lenders then make a determination on your credit score. There are five factors that go into making this determination:

• Your payment history: This factor, worth 35 percent, looks at whether you have any late payments, judgements, bankruptcies or foreclosures. Keep this portion of your score high by paying on time, every time.
• Your debt to credit ratio: This factor, worth 30 percent, looks at how much of your available credit you have used. So, if you have a $1,000 line of credit and have charged $500 on the card, you have a 50 percent debt to credit ratio. Lower is better, since it shows you can be responsible. Higher is bad, since this may suggest you live outside your means. Typically, keep this factor high by keeping the ratio to 30 percent or less.
• The average age of accounts: This factor is worth 15 percent. Refrain from opening lots of new accounts and don't close old ones in order to keep this factor high. The older your credit history, the better off you are since lenders like to see a long history of your behavior.
• The types of credit: This factor is worth 10 percent. A mix of different types of credit -student loans, car loans, home loans and credit cards- is preferred. If you have only unsecured debt, such as credit cards, lenders can't get as complete a picture of the kind of borrower you will be.
• The number of inquiries: When you open a new account, the lender checks your credit report. This is listed as an inquiry, and stays on the report for two years. Too many inquiries is bad, since it suggests you may be ready to go on a charging spree. Avoid applying for lots of loans and cards to keep this final factor, worth 10 percent of your score, high.