What is a Good Credit Score?

"What is a good credit score?" This is the question that you may have asked at one time or another when applying for a loan or getting denied credit. But before we answer the question let's first understand the concept of credit scoring.

Understanding how credit rating system works is important since this three-digit number will determine if you will get credit at all. Your credit score will determine the interest rate on your credit. In addition, since it is easy to get into bad credit a regular checking of credit reports can also help you recognize early signs of financial disaster.

What is Credit Scoring?

Credit scoring is a scientific method that is used to calculate a credit score. Depending on the credit bureau, they use several statistical models to assess a person's creditworthiness.

The next step in knowing "what is a good credit score" is to understand the factors that determine credit scores. The factors used to arrive at your credit score include: payment history, amounts of loans, length of credit history, new credit and types of credit used.

On the other hand, there are factors that are not included: personal backgrounds such as color, race, national origin, and marital status as well as employment information such as salary, occupation, employer, and employment history. Any interest rate being charged, certain types of inquiries, and any information that doesn't relate to future credit performance are also not included.

Credit reporting agencies are allowed to use different systems of credit rating. However, they are prohibited from using any of the preceding factors for calculating your credit score. This is because the above factors do not show how you would perform about your credit in the future.

What are Credit Score Ranges?

Learning about credit ranges is the next step to answering the question of what is a good credit score. Knowing credit score ranges is important since these scores are used by lenders to determine whether or not you will get credit as well as to calculate your loan's rate when reviewing your application for a car loan, mortgage, or credit card.

FICO scoring system is the most popular credit scoring system used by credit reporting agencies. The score is called the FICO score and it runs in a scale of 300 to 850. If you have a credit score range of 720 or higher, that means you have very good credit. This also means that lenders will probably offer you the most favorable interest rates.

But if you score between 680 and 699 you can still get a normal loan with normal interest rates. And the average credit score of people in the United States is in the range of 620 to 679. If you belong to these credit ranges it means you can still get a loan but the terms are not as generous as the higher credit ranges.

In addition to the FICO scoring system, there are the three major credit bureaus and several smaller independent firms that provide their own credit scores using their own credit scoring system. This means that your credit scores may vary from credit reporting agency to another. However, normative ranges used so that a score of 700 from Equifax may indicate the same credit worthiness with Trans Union and Experian.

So knowing what is a good credit score comes in handy whenever you are faced with inconsistent or low credit scores. You can take steps to increase your score because you know what factors are involved in order to calculate the rating.

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