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What’s A Good Credit Score?

What’s a good credit score? Most consumers know that the higher the credit score, the more likely it is that they’ll be able to complete major purchases. But what goes into creating a good credit score?

First, consumers should understand that credit scores are calculated by a financial data reporting company called FICO, which stands for the Fair Isaac Corporation. The FICO score is a number that represents a person’s financial life.

Thanks to the recent economic upheaval, more people are shying away from using credit. However, unless one is extremely wealthy, avoiding credit may not be such a good idea. That’s because FICO scores are now being used as a way to judge a person’s reliability in other areas, such as employment, home rental and insurance risk. It sounds unfair and arbitrary (and maybe it is), but that’s financial life for ordinary people these days, so it pays to learn how to work the system that produces credit scores.

So what’s a good credit score? The quick answer is 760 or above (FICO scores go up to a maximum of 850). However, the total of a credit score is only part of the answer. What goes into the calculation of that credit score is as important as the final number. FICO scores are evaluated according to five components: Payment History, Utilization, Credit History, Inquiries and Credit Types. Each of these components is assigned a percentage of the total score, but only FICO knows the actual calculation by which the score is achieved.

That’s why it has become so critical that consumers do everything they can to improve their credit scores. FICO’s scale for assessing creditworthiness begins at 300 and rises to 850, the maximum. Most people have credit scores somewhere in the 600s and 700s, but FICO considers 760 to be a “good” credit rating.

While FICO’s formula is secret, the general components of a good credit score are known. Each component is assigned a portion, or percentage weight, of the total rating. These components and their percentages are Payment History (35 percent), Credit Utilization (30 percent), Credit History (15 percent), Credit Inquiries (10 percent) and Types of Credit (10 percent). Different lenders give varying amounts of significance to the parts of a credit score, although these days lenders prefer that borrowers keep their credit use down to about 10 percent of their available balances.

Knowing the components that go into what’s a good credit score can help consumers build up their creditworthiness.

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