Credit scores are a trio of numbers assigned to Americans that many entities use to gauge the ‘creditworthiness’ of applicants. These numbers are split into credit score ranges that are used to communicate to financial companies and lenders the likelihood of someone repaying borrowed money on time.
Your credit score indicates your experience and responsibility in managing a diverse mix of credit, such as credit cards, personal or student loans, and mortgages. Also, your credit can be considered for insurance quotes, and a potential employer may even check your credit score, depending on the position you are being considered before.
That’s a wealth of information packed into these three digits so we’ve created a guide to help you in decoding credit score ranges. Ultimately, they help lenders evaluate the risk of extending credit, determine your suitability for approval, and establish applicable terms (like interest rate).
Given your credit score’s pivotal role in securing favorable terms when borrowing money, it’s essential to understand what your credit score means.
Credit Score Ranges
Credit scores usually fall within a designated range, where higher scores signify lower credit risk and vice versa. Credit scoring models, such as FICO and VantageScore, are responsible for determining credit score ranges.
Before we get into how lenders could potentially interpret these scores and how you can improve yours, here’s a breakdown of the credit score ranges:
- Poor (300-579)
- Fair (580-669)
- Good (670-739)
- Very Good (740-799)
- Exceptional (800-850)
It’s worth noting that you shouldn’t equate your credit score to who you are as a person or allow it to impact your self-worth. So many factors go into credit score assessment, and those factors can’t always be under our control. Things happen and situations change, so get comfortable with the knowledge that your credit score will fluctuate. This is the numerical representation that holds significance in a financial context (and can be improved), but it never dictates your value.
Now that you’re familiar with the credit score ranges, the next step is understanding how a lender could perceive them and what it means for you.
- Poor (300-579)
Individuals in this credit score range could be perceived as having higher credit risks. Lenders might exercise caution when extending credit, and if approved, the terms could include higher interest rates and less favorable terms.
For example, credit card applicants in this range might only meet the criteria for secured credit cards. These cards require a cash deposit that determines the card’s credit limit and serves as collateral if the cardholder fails to make payments.
- Fair (580-669)
While an improvement over a poor credit score, individuals in this credit score range are often considered “subprime” borrowers and could still face challenges securing credit. Interest rates and terms will typically be higher than those offered to individuals with higher scores, but this can improve with healthy credit use as your score increases.
- Good (670-739)
A good credit score signals a lower credit risk, and lenders generally consider individuals in this credit score range as “acceptable” borrowers. Individuals in this range are likely to qualify for various credit products with reasonable interest rates and favorable terms, though still not the best available.
Fun Fact: The ‘good’ credit score range encompasses the average credit score in the U.S., which stood at 714 in 2022.
- Very Good (740-799)
A very good credit score reflects strong creditworthiness. Individuals in this credit score range are typically offered competitive interest rates and favorable terms on credit products. Approval is typical.
- Exceptional (800-850)
An exceptional credit score signals the highest level of creditworthiness. Individuals in this credit score range often receive the most favorable terms, including the lowest interest rates and fees, and typically experience an easy approval process.
The Importance of Credit Score Ranges
While credit score ranges simplify the complex task of gauging an individual’s creditworthiness, it’s important to note that the concept of credit scores and ranges goes beyond just protecting lenders.
They also protect you by establishing parameters that prevent you from being offered credit that you can’t afford and promote responsible borrowing by encouraging you to maintain good credit behavior to secure more favorable terms.
Increasing Your Credit Score Range
One of the best aspects of credit scores is that they will fluctuate and can change quickly.
Even if you’ve maintained an exceptional credit score for years, an ongoing effort is required to sustain it. This protects you against approvals for credit beyond your current financial capacity based on a historically exceptional credit score.
Conversely, if you’ve faced financial setbacks such as bankruptcy or other major credit issues, the silver lining is that you’re not bound to that situation forever. There’s always room for improvement when it comes to your credit score, and here are a few common strategies to consider:
- Pay your bills on time: Your payment history is one of the most influential factors in determining your credit score. Missing a single payment or making a late payment can result in a negative mark on your credit report, potentially leading to a drop in your score. To help ensure timely payments, consider setting up auto payments.
- Reduce credit card balances: Strive to maintain low credit card balances, as this directly impacts your credit utilization ratio (credit card balances relative to credit limits). It’s generally advised to keep your credit card balances below 30% of your credit limits to maintain a healthy ratio.
- Avoid opening too many accounts: Applying for multiple credit accounts in a short period can be perceived as risky behavior since it could suggest financial distress or an urgent need for credit. While a single hard inquiry typically has a minor impact, the cumulative impact of multiple inquiries can be more significant. Space out new credit applications to minimize a negative impact on your credit score. Also, having different types of credit accounts in good standing, such as revolving, installment, credit, etc., is important for good credit health.
- Don’t close unused credit cards: Closing old or unused credit cards can reduce your overall credit limit and consequently increase your credit utilization ratio. Keep these accounts open unless they come with high annual fees or have encouraged overspending.
As you implement these strategies, stay patient and persistent. Depending on the factors affecting your credit score, building or rebuilding your credit can take months or even years. Focus on cultivating positive financial habits and have confidence that you’re headed in the right direction, even when you don’t see instant results.
Monitoring Your Credit Reports
Even though your credit reports should ideally reflect accurate information, it’s not uncommon for mistakes to occur. These could include duplicate accounts, on-time payments mistakenly reported as late, incorrect credit limits or balances, or even accounts opened fraudulently under your name.
Such errors have the potential to negatively impact your credit score and bump you into a lower credit score range, which underscores the importance of vigilantly monitoring your credit reports.
Make it a habit to regularly review your credit reports to check for inaccuracies and dispute any discrepancies with the credit reporting agencies. Request your updated credit score at least once annually. If you don’t have a credit monitoring app or service, you can visit the annual credit report website to get one free credit report each year.
Sometimes, boosting your credit score could involve incorporating a new form of credit into the mix and showcasing responsible usage. While adding a mortgage or personal loan may only sometimes be practical or necessary, a credit card can be a handy tool to help build or rebuild your credit when used responsibly. Every situation is different but understanding credit factors can help you to determine what you need to do to accomplish your credit goals.
Here’s to increasing your credit score range!