You know you don't want to have "bad" credit. And you also don't want to have no credit at all. That leaves only one desirable option: good credit!
But what's considered good credit these days? And how much do you stand to gain by having good to excellent credit? Let's break it down.
Modern credit scoring models
To know what's considered a good credit score, you first need to know what the scale is. There are actually quite a few different credit scoring models, including many that are specifically tailored for things like mortgage lending and auto lending. In fact, even the companies that produce credit scores typically offer multiple variations and iterations.
The most widespread by far, however, is the FICO Score. Developed by the Fair Isaac Corporation, it's so prevalent that the brand name is often synonymous with the product itself (see also: Xerox and Frisbee).
It's not the only game in town, though. VantageScore was developed jointly by the three most prominent credit bureaus (TransUnion, Experian, and Equifax). Both systems have several versions and they typically weigh the same information, just in a different ratio. For example, VantageScore puts slightly more emphasis on your payment history. It's also a bit more nuanced: where FICO has a category for "amounts owed" that makes up 30% of your FICO score, VantageScore separates that same information into three distinct categories (credit utilization, balances, and available credit).
For both FICO and VantageScore, however, the score range is the same: 300-850.
FICO Score range
- 800-850: Exceptional
- 740-799: Very good
- 670-739: Good
- 580-669: Fair
- 300-580: Poor
VantageScore range
- 781-850: Excellent
- 661-780: Good
- 601-660: Fair
- 500-600: Poor
- 300-499: Very poor
It's notable that VantageScore has a more lenient take on what's considered an "excellent" score, while FICO lumps everything below 580 into the same boat.
What's a normal credit score?
As you can see, credit scores can come in a wide range, so there's no normal or abnormal when it comes to credit. Looking at the average, however, we can see that nationwide credit scores have been largely "good" and improving over time.
In 2023, the average FICO Score in the U.S. was 715, firmly in the camp of "good, not great". Importantly, however, 2023 was the tenth straight year where average FICO Scores either improved or held steady. In 2013, the average was 691.
When scores are improving it means that lenders may have higher standards for credit. As scores continue to rise, it's important that you work on your own credit or risk falling behind.
What's the value of having good credit?
Good credit can help open a lot of doors. Among other things, a good credit score can help with:
- Job hunting - Some employers may require a strong credit history if the job involves financial responsibilities or important security clearances.
- Finding a good apartment - Many landlords require a credit check as part of the application process, and you may be disqualified from some opportunities if your credit score is too low.
- Avoiding security deposits - Security deposits are a way for landlords and utility providers to offset risk. If you have a high enough credit score, you may be perceived as having very little risk, which may result in certain security deposits being waived.
- Better insurance rates - Some insurance companies use credit scores as a factor in determining insurance premiums. People with excellent credit scores may qualify for lower rates on auto insurance, homeowners insurance, and other types of insurance coverage.
The biggest value of good credit is almost always financial. Good credit = low risk to lenders = better rates for you.
Bankrate broke down the average interest rate for personal loans by credit score. Excellent credit resulted in an interest rate between 10.73% and 12.50%. Poor credit resulted in interest rates as high as 32%.
For reference, a $10,000 loan at 12% APR with a 5 year term would cost approximately $223 per month and $13,350 once paid in full. A $10,000 loan at 28% APR with a 5 year term would cost approximately $312 per month and $18,680 once paid in full. In that scenario, bad credit would literally cost you $5,000 in added interest costs.
Auto loans rates are lower than personal loan rates since they're secured by real property (in this case, the car), but the cost of having bad credit can still be massive. Bankrate found that the average interest rate for used car borrowers with FICO Scores of 781 and above was 7.66%. For borrowers with a score below 500, the average APR was 21.55%.
How to get good credit
While all credit scoring models weigh factors differently, there are some universal truths:
- Don't miss payments
- Don't use too much of your available credit
- Maintain multiple types of credit successfully
- Don't open too many new accounts all at once
If you're interested in learning more about your credit history, including ways to improve your credit history over time, MMI offers one-on-one credit report reviews. We'll help you understand every element of your credit report and create a personalized plan to make your credit goals a reality.
