Good Credit Score: What It is, How It is Achieved

Technically, a "good" credit score is between 670 and 739 and this is the average range of a U.S. credit score. A good credit score has a many advantages for your financial health. So, it's crucial to know what a good credit score is so that you can achieve one.

The term credit score often refers to your FICO score. Actually, you likely have slightly different FICO scores from each of the three major credit reporting bureaus based on the information they have on you. This means that your FICO score from Equifax might be different from your Experian or TransUnion score, but probably not drastically different. If it is, you’d better do some investigating.

Credit Scores Defined

The highest score possible is 850 while the lowest is 300. In reality, achieving an credit score of 850, which is "exceptional" is fairly rare. It would take a perfect combination of many factors to get there.

The ideal credit score to get you the best interest rates, payment terms, and perks that come from being rated among the best of the best is above 760. Credit scores of between 740 and 799 are considered "very good."

For many people, achieving a "very good" score will take concerted financial steps and patience.

Even if you don’t have a credit score of 760 or above, you can still have financing options available to you with a "good" credit score, including some with competitive rates.

Benefits of Good Credit Scores

Having a good credit score or higher can open financial opportunities. For example, if you’re looking to buy a home, a score of 500 is the minimum credit score requirement to qualify you for an FHA loan. However, many major lenders require a minimum score of 580 for FHA loans. 

Conventional mortgages are hard to get with a score below 620 and some lenders require at least 700. This is why financial gurus advise people who want to buy a home to not miss bill payments or overextend themselves with credit cards or other loans. You’re going to need stellar credit to become a homeowner in most cases.

Also remember that the better your credit score is, the lower the interest rate you'll be offered and the less you'll pay.

Consider a 30-year mortgage of $200,000 at a fixed rate: According to one data set, the difference in interest rates for people with a 760 score versus a 620 could be 1.6%. That’s a $64,325 difference over the life of the mortgage.

In addition to mortgages, good credit scores can play a role in whether you will get other financial products such as credit cards, personal loans, or auto loans.

How to Increase Your Credit Score

Several factors go into determining your credit score including: your payment history, your credit utilization ratio (the amount of debt you have compared to the line of credit that is available to you), your credit mix, the length of your credit history, and how recently and frequently you've applied for new credit.

Let's take a look at each factor and review what steps you can take to improve that impact on your credit score to achieve a good credit score or higher.

Payment history

Your payment history accounts for the 35% of your FICO credit score, making it the most important factor. This is essentially your record of on-time payments. If you have a history of late payments, the best thing to do is ensure to make every payment (at least the minimum) on time. Over time, your credit score will increase but it may take several months or more.

Credit utilization ratio

Your credit utilization ratio (or amounts owed), which accounts for 30% of your credit score, is the amount of debt you have compared to the line of credit that is available to you. For example, if you have a credit card with a limit of $1,000 and you have used $750 of that line of credit, your credit utilization ratio would be 75%. A lower credit utilization ratio will have a more positive impact on your credit score.

To improve your credit utilization ratio you need to pay down debt. (You can also apply for more credit, but this will tempt more spending and can also lower your score by affecting your "new credit" factor.) Turn to your budget to determine how you can contribute more than the minimum payment to your bills.

Credit mix

Your credit mix is the variety in the type of credit and loans you have. For example, if you have fixed-rate personal loans, a credit card, and a mortgage, you have a good mix in credit. If you only have credit cards, your credit mix may leave lenders wondering if you can manage different types of credit.

However, avoid taking out new loans just to increase your credit mix is not idea. Afterall, you could find yourself in more debt, which can decrease your credit score. Your credit mix accounts for 10% of your credit score.

Length of credit history

Lenders generally like to see a longer credit history that proves you have successfully managed credit for some time. However, there is not much you can do to improve this aspect of your credit score other than ensure you have at least one form of credit, even if it is a credit card you pay off each month.

New credit

If you apply for too much credit, a lender may suspect you are desperate for funding. If you are applying for a new loan, avoid taking out other credit as you go through the application process.

Frequently Asked Questions (FAQs)

The Bottom Line

If you’ want to improve your credit score, there are ways to increase it. Understand, however, that your score isn’t likely to improve rapidly.

Given you manage your credit responsibly, you can steadily increase your score to the good range or beyond. Taking good care of your credit score means reducing debt, pay your bills on time, and avoiding overspending.

If you go through some bad times, focus on when you can get back on track and follow through as quickly as you can.