What Does Your Credit Score Range Mean?

You know what’s not stressful at all?

Going to a lender just to get rejected for a loan. Yeah right—actually, it’s extremely nerve-racking and we wouldn’t wish it on anyone. 😰

As much as we may not want to admit it, our finances influence our self-worth, which is why maintaining our financial health is vital to our overall well-being. One way to ensure you can meet your personal and financial goals is to exercise a low-risk lifestyle, which doesn’t have to be as boring as it sounds.

While 2020 was a risk-filled year due to Covid-19, an unpredictable economy, and social unrest, millennials have taken an 11-point stride towards the credit score apex, proving to be a low-risk bet for lenders. Becoming a safe bet is as easy as learning how your credit score is assessed and by taking the right steps to reach an altitude where you can save money with leaner interest rates. 

Since your credit score matters and determines how much money you might spend on everyday items, as well as your mortgage, you ought to understand how it works. In this article, we will explain what credit score ranges there are, what they mean for your finances, and how you can make sure you’re in the right one.

Ready? Let’s get to it! 🚀

What you’ll learn

• Why Your Credit Score is Important
• Credit Score Ranges Explained
• What Impacts Your Credit Score
• What's a Good FICO Score?
• What's a Good VantageScore?
• Why Did My Credit Score Drop?
• How to Improve Your Credit
• Credit Score Range FAQs

Why Your Credit Score is Important 👇

Your credit score, sometimes called a “risk score,” signifies your ability to pay back a loan and guides creditors in determining the interest rate and the amount needed for a down payment. The higher the risk, the higher the interest rate and down payment. If you are able to get a mortgage, having bad credit will likely cost you beaucoup bucks, even now, when interest rates are at rock bottom. 

Your credit score is also important for smaller purchases and can impact insurance rates, cell phone plans, rental agreements, and utility hook-ups. Essentially, having good or exceptional credit means lenders are more willing to offer you competitive loan agreements and interest rates—all the cheapest personal loans nowadays will require a hefty credit rating from you, so it pays to keep it healthy.

Credit Score Ranges Explained 👨‍🏫

A credit score can be as low as 300 or as high as 850 and, depending on the value, is considered very poor, fair, good, very good, or exceptional. Those with a poor credit score are considered more likely to default on a loan, meaning they are a higher risk for a lender. 

For example, the Federal Housing Administration, established to assist subprime home buyers with FHA loans, requires a minimum credit score of 500 with up to 10% down. Additionally, to compensate for higher risk, FHA loans have heftier mortgage insurance premiums than conventional loans. 

On the other hand, those with exceptional credit are considered unlikely to default on a loan, making them less of a risk, which means they are not only likely to be offered lower interest rates but also given higher credit limits, the power to renegotiate interest rates, and utilities that don’t require a deposit. As of now, credit scores also impact insurance rates, although the Office of the Insurance Commissioner has requested a ban on using credit scores to set premiums. 

Factors That Affect Your Credit Score ✅

Creditors examine several factors before determining whether or not a consumer has a clean bill of financial health or poor spending habits that present pre-existing risk factors.

In making their evaluation, creditors look at payment history, utilization rate, the various types and number of credit accounts, the age of credit accounts, total debt owed, prior filings for bankruptcy, and how often the credit score is reported, and these criteria can be further broken down so anyone with a budgetary pulse can understand them.

Payment History 💸

Payment history is perhaps the most straightforward and influential factor determining a consumer’s credit score. Basically, creditors examine all of a consumer’s accounts—credit cards, car loans, mortgages and the like—to ensure the consumer is at least making the minimum payment at the time the payment is due. Consumers who make regular, timely payments are considered low-risk.

On the other hand, a risky consumer has late or missed payments. The degree of risk is contingent on how much was owed, how recently the payment was late or missed, how many payments were late or missed, how many days the payment was late, if any accounts went to collections, and how many accounts are in good standing versus bad standing. 

This can be understood by comparing two borrowers. Someone who has four accounts and has been late making a few payments on one of those accounts would be considered less of a risk than someone who has four accounts in which most payments were made more than 30 days late. 

Credit Utilization Rate ⚖️

The credit utilization rate, also called utilization ratio, is determined by a simple equation based on revolving credit, which is credit that circulates from one billing cycle to the next (think credit card opposed to monthly installments to pay off a car). To determine the credit utilization rate, creditors divide the amount of revolving credit a consumer is using by the total amount of revolving credit available to the consumer.

Generally speaking, creditors prefer consumers who use no more than 30% of their credit limit. For this reason, a consumer is better off paying in full instead of making minimum payments and allowing debt to carry over into the next billing cycle, where it incurs interest and weighs down their utilization rate. 

Likewise, a consumer might want to keep an account that is used sparingly in order to increase their overall available credit and lighten their utilization rate. However, consumers should be careful not to keep an account with a zero balance indefinitely. Lenders see these accounts as attempts to pad one’s utilization rate.

Type and Number of Credit Accounts 🗂

Lenders prefer consumers who successfully manage different types of credit because it illustrates a versatile understanding and an ability to balance varying pay structures and agreements. For example, a consumer with a credit card, a car loan, and a home equity loan (or HELOC), is familiar with revolving credit, installment credit, and collateral credit. 

Credit Age 🌱

Making payments on time and in full for six consecutive months is easier than making payments on time and in full for six consecutive years, which is why the age of a consumer’s accounts and their credit age (the average age based on all their credit accounts) is important to lenders. 

Since past behavior often predicts future behavior, lenders can better assess consumers with a wiser credit age, which is why older people tend to have higher credit scores than younger people. Young people have no credit history, so they need to build up their credit in order to get their hands on the best deals (and save a ton of money on interest in the process). 

Total Debt 💰

Total debt and how it is evaluated is seemingly paradoxical, which leaves people to wonder what will hurt their credit score more—carrying too much debt or carrying too little debt. Consumers with excellent credit are nearly $100,000 more in debt than consumers with very poor credit, which seems to support the idea that carrying a lot of debt can benefit one’s credit score. However, carrying too much debt is a red flag that a borrower is overextended and will soon have trouble making payments.

Prior Filings for Bankruptcy 📄

If having a bad credit score is like having a flat tire on your car, then having a bankruptcy is like having 2 flat tires and an angry raccoon under the hood. The problem with this fluffy menace in particular is that it won’t move for 7 to 10 years unless forcefully removed (and doing that is not easy).

But whether a consumer is a part of the 44.4% who filed bankruptcy due to their prodigal lifestyle or part of the 66.5% who file bankruptcy due to medical expenses, lenders treat bankruptcy the same. It is considered such a high risk that it sticks to your credit longer than other delinquencies, which is why you should always attempt to strike bankruptcy from your credit report.

Credit Score Inquiries 📊

When a lender accesses an account for the purpose of assessing a borrower’s risk, the credit bureaus record the name of the lender and the date of the inquiry. This is called a “hard inquiry.” Although not as significant as other factors, too many hard inquiries can hurt a person’s credit score because it suggests a buyer is attempting to open several new credit accounts, which increases their risk. 

Soft inquiries, those made by the account holder or those done by a third party for pre-approval, do not hurt one’s credit score. There are various services that score credit, and the systems are generally the same. Two of the major scoring services are FICO and VantageScore.

What is a Good FICO Score? 👏

A good FICO score ranges from 670 to 739, but even those who score 620, which is at the lower end of the fair range (580-669), are usually able to get a conventional mortgage, which means fewer fees than an FHA loan. Those who score 740 or more qualify for loans with the lowest interest rates, which provides more opportunity to work with the top mortgage lenders. 

FICO was developed by Fair Isaac Corporation founders Bill Fair and Earl Isaac in the late 1950s, and a version of this system is still used today by all major consumer reporting agencies in the U.S. and is also used in Mexico and Canada. FICO weighs payment history on loans and debt burden more than credit history, types of credit, and recent credit searches. 

What is a Good VantageScore? 🙌

A good Vantage score ranges from 661-780, although those who score in the fair range (601-660) might still be able to qualify for a high-interest loan. As is the case with a FICO score, having a higher VantageScore comes with more benefits. Those in the excellent VantageScore range (781-850), are more likely to be given the most competitive loans. 

VantageScore has had several variations since it was created by Experian, Equifax, and TransUnion in 2006. It evolved out of a grade-based scale that ranged from A to F with a point range of 501 to 990. Today, VantageScore uses a FICO-like scale. In 2017, lenders and consumers saw some important changes with the release of VantageScore 4.0. 

In addition to being more lenient with medical accounts sent to collection, VantageScore stopped considering paid collection accounts and started considering credit utilization trends over time, which is different from FICO, which only examines the most recent billing cycle and factors in paid and unpaid accounts sent to collection. VantageScore weighs payment history, age and credit type, and utilization ratio more than balances, recent inquiries, and available credit.

VantageScore is free, which is helpful for consumers who want to monitor and track their credit. Many different entities like to look at your VantageScore over your FICO, but this rating system is mostly used by lenders, landlords, and various financial institutions. 

Why Did My Credit Score Drop? 📉

Whether your credit score took a dip or plunged to the base where the only offers come with bloated interest rates and heavy down payments, it is important to know why. Some of the more common reasons for a falling credit score include late or missed payments, an account in collections, a maxed-out credit card, bankruptcy, and foreclosure. 

It is also important to check if the credit limit was lowered on any accounts. If a creditor lowers a consumer’s limit due to inactivity or missed payments, it will nevertheless increase the consumer’s utilization ratio and cause their credit score to fall. In rare cases, a credit score can drop due to an administrative error. 

Credit Reporting Mistakes ⚠️

If you have lived a financially fit and balanced life and don’t understand the cause of a falling credit score, it could be due to a number of reporting mistakes, including a payment mislabelled as late, unsolicited hard credit checks, new accounts created by someone else in your name, or a misfiling. If a mistake has been made, you can remove the error yourself or hire a local credit repair agency to help you.

How to Improve Your Credit 💡

The best and easiest way to boost your credit score is to maintain a balanced financial life, ensuring bills are paid on time, credit balances are kept low (no more than 30%), high balances are paid down, unused credit lines are kept open, and applications that require hard credit checks are kept to a minimum. If the FED keeps going “BRRRR,” use your next stimulus check to pay off some debt instead of investing in dogecoin. Or maybe do both.

What is My Credit Score if I Have No Credit? 💨

Before you can improve your credit, you must first establish credit, which can feel like an impossible task when a lender denies your application because you have no credit. There are several ways to establish credit, including opening a secure credit card, starting a joint account, finding a co-signer, or reporting rent and utilities to a credit bureau.  

About the author

Tina Mitchell

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Tina Mitchell is a freelance writer with a Ph.D. from the University of Louisiana at Lafayette, where she also taught for fifteen years. After working as a research assistant and writer for the Financial Transitionist Institute, she learned how economic illiteracy was hindering people in various life stages. Writing for The Tokenist, she hopes to empower readers to take control of their financial destinies. In addition to her work as a freelancer, she cofounded im-possible, a nonprofit, transdisciplinary think tank that focuses on posthumanism and our developing human condition. She is also the editor of an award-winning journal focused on the dialectics of the human and its environments. When she is not working or sailing, she is likely planning her next prank or hugging a tree.