When it comes to personal finance, it’s hard to find a number that’s more important than your credit score. From the loans you can get to the interest rates you’ll pay, the financial implications of your score are hard to overstate.
And just recently, the news broke that the calculation used to determine FICO scores is changing, with a heavier emphasis on overall debt load, payment history, and types of debt. FICO claims this could mean a 20-point increase for people with credit scores above 680, but people who are struggling may see ever sharper dips for missed payments and high balances. Let's talk about what it could mean to you.
What hasn't changed: The numbers
The credit score ranges, as shown below, will remain the same. The only difference is that some of the calculations used to tabulate those scores are being modified.
In basic terms, credit scores measure how likely you are to repay a loan. That’s why businesses use them in their lending decisions: They’re making an educated bet on whether they’ll get their money back.
Virtually all credit reports rely on one of two providers: FICO or VantageScore (with the large majority of lenders using FICO). These companies put people’s financial data through their proprietary algorithms, producing the single number that forms your score. Here’s where the headaches start, though: Your score will differ depending on which company is running the numbers, and both have a variety of scoring models geared toward particular types of loans.
Currently, FICO and VantageScore employ a scale ranging from 300 to 850. The higher the score, the greater the chance a borrower will pay his or her debt. It’s worth noting that this scale only includes those with sufficient credit histories to receive a score at all.
What sort of data do these scores entail? Criteria has historically included:
- Payment history
- Amount of debt owed
- Length of credit history
- Recent inquiries for new credit applications
- Types of credit used (credit, installment loans, etc.)
- Available credit
What is changing under FICO 10 T
As of January 2020, FICO is rolling out a new scoring model called FICO 10 T. This model will consider additional criteria in evaluating scores, including:
- Whether you've fallen behind or missed payments.
- Whether you've taken out a personal loan, which is an increasingly popular form of unsecured credit.
- Whether your total level of debt has increased or decreased over time.
VantageScore already evaluates this criteria, so your score there is unlikely to change.
The good news: Borrowers with scores of 680 or above who continue to make on-time payments may see an increase of 20 points under FICO 10 T.
The bad news: Borrowers who are already struggling, with scores below 600, may see their scores fall by about 20 points if they continue to miss payments.
However, keep in mind that lenders are not obligated to adopt the FICO 10 T model. Instead, they may opt to use the FICO 10 system, which is in closer alignment with the previous scoring model.
What is considered a good credit score?
Now that we understand what these scores assess, we can characterize and compare different credit score ranges. For this article, we’ll focus primarily on FICO score ratings. That’s because the vast majority of lending decisions utilize FICO scores, so it’s the standard by which you’ll likely be judged.
Excellent Credit: 800+
- In this credit score range, you can expect lenders to roll out the red carpet. You’ll be offered good terms and may even be able to negotiate for better ones.
- An estimated 1% of borrowers in this credit score range will become delinquent on their loans.
Very Good Credit: 740 to 799
- In this range, you’re still a very attractive borrower to the vast majority of lenders. Your interest rates will probably be favorable as long as you’re not stretching your income to make the purchase in question.
- An estimated 2% of borrowers in this credit score range will become delinquent on their loans.
Good Credit: 670 to 739
- Credit scores in this range are close to the national average, and you can anticipate getting credit in most cases. Unfortunately, you may not be thrilled about the amount of interest you have to pay.
- An estimated 8% of borrowers in this credit score range will become delinquent on their loans.
Fair Credit: 580 to 669
- Consumers in the category may have trouble obtaining credit. When they do, their interest rates will be significantly higher than that of most borrowers.
- An estimated 28% of borrowers in this credit score range will become delinquent on their loans.
Poor Credit: 579 and lower
- Would-be lenders will often reject those seeking loans with scores in this range. To get even modest loans, they may be asked to pay fees upfront to offset lending risks.
- An estimated 61% of borrowers in this credit score range will become delinquent on their loans.
How your score affects what you pay
While these ranges are a good guideline for assessing your credit health, lenders scrutinize specific score ranges far more carefully. We want to provide some tangible evidence of the consequence of credit scores in your financial future. While each industry assesses different criteria, let’s explore how much your credit score could end up costing you if you apply for a mortgage.
- Suppose you want to buy a home for $200,000, a modest purchase relative to the median price for new homes sold nationwide. You sign up for a 30-year fixed-rate mortgage.
- If your credit score were 760 or better, here’s an estimate of what you’d pay:
- 3.6 percent APR
- $907 monthly payment
- $126,617 total interest over your mortgage term.
- On the other hand, if you had just “fair” credit, your terms would be far less appealing. If your credit score fell between 620 and 640, you’d be looking at the following:
- 5.2 percent APR
- $1,095 monthly payment
- $194,071 in monthly interest
In this example, the better score would save you almost $200 a month, and nearly $70,000 in the long run. With numbers like these, there’s no denying the importance of your credit score range.
America's most common credit scores
Now you know how to classify your credit and how it dictates interest costs over time. But you’re probably wondering where you stack up relative to the rest of America. After all, the ranges aren’t necessarily comparable: While an 800 or higher might be “excellent,” half of Americans could theoretically fall in that range. On the other hand, the majority could have poor credit in the eyes of the country’s lenders.
We crunched the FICO data to get answers about how common various scores really are. In 2017, the average credit score in America was 700, solidly in the middle ground of “good” credit. Here’s a closer view of how America’s scores broke down prior to the January 2020 FICO change:
- 300–499: 4.7% of population
- 500–549: 6.8% of population
- 550–599: 8.5% of population
- 600–649: 10.0% of population
- 650–699: 13.2% of population
- 700–749: 17.1% of population
- 750–799: 19.0% of population
- 800–850: 20.0% of population
Time will tell if the percentages change under FICO's new model. But in the recent past, the majority of the country was concentrated at the top of the credit scale. But if you're one of the people in the lower-scoring groups, know you’re not alone. Nearly 5% of the American public is still plenty of company.
Improvement is possible
If your current credit score range leaves you unsatisfied, you’re not doomed to endure poor credit forever. Thankfully, your score can change for the better if you demonstrate responsible borrower behavior – entitling you to better terms in the future.
Below, we’ll list some top tips from our Best Ways To Build Credit guide. Put them into practice, and your score should steadily increase:
Quick Tips For Improving Your Credit Score
Make Payments On Time
Missed payments can make your credit score plunge. Avoid them at all cost, and try to pay more than the minimum each month if possible.
Keep Credit Utilization Low
Just because you can borrow more doesn't mean you should. As a general rule, avoid carrying a balance that's more than 30 percent of your total credit limit.
Get a Secured Credit Card
Unlike most credit cards, these are specifically intended to help you build credit at no risk to your lender. You give your lender cash equivalent to the total amount you can borrow, then make full and timely payments on whatever you borrow each month.
Take On a Credit Builder Loan
Another product designed specifically to help you build credit, these loans keep the money you borrow saved away until you pay it back in full. At the end of the loan, you get the amount you've paid in full, so you're really saving and building credit simultaneously.
Look Into Cosigned Credit
If someone with strong credit is willing to cosign a loan with you, evidence of responsible repayment will be reflected in both parties' credit reports. It's a great way to get a loan you couldn't obtain on your own, and build credit while you're at it.
Become an Authorized User
If someone adds you as an authorized user to their current line of credit, you can benefit from their solid payment history. Many parents use this option to help their children establish or improve their credit histories.
In taking these steps, you’ll need to keep close watch of your various debt obligations. That can get complicated if you’re working through paperwork from multiple lenders. If you have student loans, refinancing to a lower interest rate can be a smart option for saving money, staying current on your payments, and getting out of debt faster.
Rethinking your range
Whichever range your credit occupies currently, we hope this guide clarifies your score’s interest implications. Even if the facts we’ve presented don’t seem like particularly good news, there’s power in knowing just how much your credit score could be costing you. There’s no reason to believe your score is set in stone, even if you’ve made significant mistakes in managing your credit before. With consistent and timely payments, you can build a body of evidence that will convince lenders to see you – and your score – differently.
Learn more about how to improve your credit score here.