What’s a Good Credit Score? Should you Care?

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in Credit,Recommended

What's a Good Credit Score

Usually our conversations here are limited to getting away from credit but I want to talk about something you cannot ignore which is your credit score or its official name the FICO score more important we’ll answer the question: What’s a Good Credit Score? FICO is a reference to the company that manages the reporting which is the Fair Isaac Corporation. Now it’s easy to think that since I don’t want to take on any form of debt it’s safe to ignore my credit score but it’s not that simple. More and more employers, landlords and insurance companies check your FICO score as part of their review process which could keep you from landing a job, renting an apartment or getting a good rate on your various forms of insurance.

What’s the FICO Credit Score Range?

They start from a low of 300 to a top score of 850. More than likely your credit range will fall in the 600 to 700 range assuming you don’t have any form of catastrophic credit event.

What’s the FICO Score and How is it Calculated?

The FICO score is simply a number representing your life as it relates to debt and debt instruments. It’s a private algorithm that is closely guarded but there is general information available as to how it’s calculated. Like it or not it’s the indicator of your creditworthiness. The credit score is calculated using five key categories. See our pie chart for the breakdown.
FICO Breakdown

What the Numbers Mean

35% of your Credit Score is devoted to Payment History. This would include missed payments, collections, bankruptcies and the like. The older the information the less of an impact on your overall score.
30% of your Credit Score is based on Utilization. This is the amount of credit you have in used as compared to your available credit. The recommendations point to less than 10% of your available credit be utilized.
15% of your Credit Score is impacted by your Credit History. Effectively how long you’ve had accounts open and obviously takes some time to build.
10% of your Credit Score is based on Inquiries. If you apply for various forms of credit and then don’t get that credit it will impact you negatively. Checking your own credit does not impact this number.
10% of your Credit Score is determined by Types of Credit. This would be different forms of credit such as mortgages, auto loans, revolving credit and installments.
Is something Missing? You’ll note that there is no consideration for your actual income in this model. Interesting to say the least.

What’s a Good Credit Score?

The short non-scientific answer is 760 or above. That’s going to get you the best interest rates possible on a mortgage or many other forms of credit. Obviously that number can be somewhat dynamic and depends on what the lender’s guidelines dictate. A report from myFICO shows the impact your credit score can have on your potential mortgage rate.

If your FICO score is...Your interest rate is...And your monthly payment will be...
760-8504.61%$1,109
700-7594.83%$1,138
680-6995.01%$1,161
660-6795.22%$1,189
640-6595.65%$1,247
620-6396.2%$1,323

Can I get my FICO Credit Score at AnnualCreditReport.com?

Unfortunately no. AnnualCreditReport.com is the free service that will allow you to pull 1 credit report from each of the 3 consumer credit reporting agencies: Equifax, Experian and Transunion. It will give you a list of your credit history showing current and closed accounts and your payment history. You absolutely should take advantage of this free service to manage your financial respectability but this is not the information that lenders use to make their decisions alone. It’s most heavily influenced by whether or not you have a good FICO credit score.

So Where Do I get my Fico Score?

myFICO is the official site run by Fair Isaac Corporation where you can order an individual FICO credit score from either Transunion or Equifax. Yes each of the credit bureaus maintains their own credit score although they should be very similar. Depending on how paranoid you are it may behoove you to get both of them. And for whatever reason Experian has their own reporting info although they won’t directly identify it as a FICO score but you can purchase from their site.

Monitoring your history on a weekly basis

If you are getting ready to take out a mortgage or other event where a high credit score is critical to a low rate or getting approved at all then it might make great sense to subscribe to ScoreWatch by myFICO so you can be apprised of any changes to your score each week. You can setup thresholds to have it alert when you reach your goal or find out when you might qualify for a better rate. It will also alert you if you’ve had a negative event on your credit report. It will even go so far as to send you a text message when your score changes. Probably the most valuable part of the whole membership even if you just do it for a month is the Score Power report. It gives you a full run down of your credit report, your credit score, access to the FICO score simulator and provides information regarding specific items that may be impacting your score.

Why Should I Care?

I hope to be at a point someday in the not too distant future where I don’t really care if I even have enough credit history to generate a report. At that point in my life I won’t be too worried about paying slightly higher rates for car insurance or whether a potential hiring manager is put off by my credit score. But I live in the real world of today where these differences are important. There are certainly ways to get around a bad credit score but it will make your life more difficult to be sure. There is a new book out called “How to Live Well with Bad Credit” and I just reviewed it, if you are in this place there are plenty of great tips in there for you. Best wishes to you navigating these tricky waters and here’s to reaching that place in life where we can happily kiss credit and the FICO score goodbye.

Picture courtesy Vintage85

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{ 30 comments… read them below or add one }

Craig 2010/02/09 at 7:37 am

I know I need to care but just don’t know my score. I know it’s good because I pay in full every month but being younger have not had much of a chance to really build it up and have not had too much of a reason to care which sounds ignorant.
.-= Craig´s last blog ..Interview about BudgetPulse with Mr. CC =-.

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Cheryle 2010/05/03 at 7:16 am

Craig
I just went to Equifax and for $7.95 got my score.. It is well worth the money

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Kevin@OutOfYourRut 2010/02/09 at 7:51 am

This is as good an explanation of credit score mechanics as I’ve seen anywhere. So true that we need to be concerned about our scores even if we have no debt, non creditors are looking at them these days. A sudden drop in a score could indicate a discrepancy we need to be aware of.

One caveat though is that a credit score isn’t a fixed number. It rises and falls for reasons that aren’t readily aparent and the variance can be substantial.
.-= Kevin@OutOfYourRut´s last blog ..7 Reasons Super Bowl Monday is THE Day to Start a Diet =-.

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paul 2010/02/09 at 8:50 am

Thanks for that Kevin. You are absolutely right they are extremely dynamic and FICO prides itself on giving lenders the most up to date information so it’s constantly updated. Something to be aware of as you start thinking about something like a mortgage, it would be a large benefit to get your score months ahead of time and manage it appropriately throughout the process.

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Kevin@OutOfYourRut 2010/02/09 at 9:57 am

And also time to clean up any lingering issues. It can sometimes take months to get a discrepancy removed from a credit report. Unfortunately the process does take time with both creditors and the repositories.
.-= Kevin@OutOfYourRut´s last blog ..7 Reasons Super Bowl Monday is THE Day to Start a Diet =-.

Dustin @ Inzolo 2010/02/09 at 9:08 am

Whenever it has come up, people ask “how is your credit score?” My response is “I would assume excellent” because I have always made all my payments on time. This was a good overview and interesting to see how it all works. Like you, I hope to get to the point where I simply don’t care what my score is because I have no need to ever borrow money. But on those rare times I do (such as buying a home), having a good score makes things convenient.
.-= Dustin @ Inzolo´s last blog ..How Inzolo Handles Credit Cards =-.

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LeanLifeCoach 2010/02/09 at 7:44 pm

My understanding is that your score is calculated each time it is requested. As a result your score can change from one day to the next based on how your debts and credit limits have changed.

Also, another great tool available at myFico.com is a credit simulator. By playing with it I learned and posted about how my score was actually lower because I paid off all my debt. By leaving just a few hundred dollars on my credit card my score was actually higher!
.-= LeanLifeCoach´s last blog ..Personal Finance Can Be Fun! =-.

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Brad 2010/02/24 at 9:30 am

Paul I am like you in that I do not plan on taking on any debt in order to keep my credit score alive. In fact, I am one of the ones that have nothing calculated due to lack of history. I have had the debts in my name paid off for two whole years now, so my score is “0″ so to speak.

All of the things that people usually claim to be the reason to have a credit score, I do not really care about. If I want to rent an apartment that doesn’t accept me because of my credit score, or the lack thereof, will be missing out on my business. there are plenty of places o rent out there that do not require the “how much you like to borrow” score. I will rent from them.

Jobs? Well I do not plan on working for anyone but myself, and I certainly will not make myself have a credit score in order to hire myself. LOL If I did though, I would just have to find a way around it. There are plenty of jobs out there that do not use this “number” to determine your ability to get the job done.

Insurance? Got it when I had bad credit more than 4 years ago. (auto)

The only other thing that might affect me is car rental. I would rather have a hold placed on my bank account than have a credit card to establish “credit”. I personally will always find a way around these things as long as people want to judge me for a 3 digit score that really says nothing at all about me other than I do not want to borrow money.

Being debt free and having no credit score ROCKS! My FICO score can take a hike for good! :D
.-= Brad´s last blog ..It’s Your Money, YOU Spend It! =-.

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Brad 2010/02/24 at 9:34 am

Most people do not know this but you can actually get a mortgage without a credit score by having someone that does manual underwriting to base your qualifications on actual real life data rather than a 3 digit score.

I refuse to participate in this system created to keep people in debt. :)
.-= Brad´s last blog ..Feeling Like You Are Bankrupt, Is Different Than Actually Being Bankrupt =-.

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paul 2010/02/24 at 9:58 am

Very good point Brad, there are definitely options out there for your mortgage.

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Brad 2010/02/24 at 10:10 am

Yeah there definitely are alternatives to relying on your credit score. I think the alternatives are usually seen by most as hurdles rather than solutions, mainly because they are not usually in line with main stream opinion. As I said I am willing to find the alternatives or do without. :)

Oh and I guess I should make it clear that I am not suggesting that someone go and purposely ruin their credit score. My score dropped naturally because I stopped borrowing money, but I think there are some advantages to using our current score to your benefit if possible. (like when refinancing or buying a home for those that decide to get a mortgage)
.-= Brad´s last blog ..Book Review: Living Well With Bad Credit =-.

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Belmont Thornton 2010/04/15 at 9:24 pm

Nice thought provoking article on the important aspect of credit score.I especially like the idea of monitoring your history on weekly basis.Regular monitoring on personal finance would help you to understand your credit standing.

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Chad 2010/04/18 at 9:32 pm

A couple of years ago my dad rented a car from Enterprise and just wanted to list me as a secondary driver. Because I don’t have a credit card they weren’t going to do it. I asked them if I put down a $100,000 deposit would they, and they still said no. Eventually they gave in because my dad has a credit card. The whole thing is just crazy! Like Brad, I’ll find alternatives or do without. I just wonder how much I’ll have to do with out as time goes by!

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paul 2010/04/19 at 8:49 am

I don’t know Chad but here’s to being in a place where we can find out!

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momt 2010/05/05 at 5:38 am

useful info, thanks

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Cheryle 2010/05/05 at 6:10 am

Since I am in a debt reduction program right now, I feel it’s all the more reason to keep up to date on my FICO scores. So each year I make sure I get the most current numbers in addition to my free annual credit reports.

I am happy to see that the numbers have stayed in the 707 – 727 range and even went up 7 points since January of this year.

It kinda gives me the incentive to continue what I am doing and with the few extra dollars I gather each month (after my bills, 401k contributions and savings) I will throw that on a bill and it does make a big difference.

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The Best Money Blog 2010/06/14 at 4:12 pm

Nice post. My credit score was right between ratings and ended up saving me .5% on my mortgage. Over time that’s a lot of cash!

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John Adams 2010/06/30 at 11:45 am

Find out your credit rating today from http://www.instantcreditrating.co.uk

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credit report score 2010/07/05 at 11:20 pm

Thank you for this very informative article of yours. You have explained everything well. I appreciate that you shared this to us.

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David Wilson 2010/08/25 at 6:40 pm

Thanks for the post, great info.

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Glenda Wood 2010/08/26 at 1:50 am

Unfortunately my husband left me recently and due to this I ended up in financial difficulty and had to declare bankrupcy. Since then I have managed to get my life back on track but now I struggle with any finance. I cant even get a mobile phone contact anymore because the companies are afraid I will default on my payments.

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claim 2010/09/14 at 4:22 pm

Everyone should care about theuir credit score as without one you have a mountain to climb when you look at mortgages etc. Great info.

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Debt Settlement Lawyers 2010/10/24 at 10:11 pm

Always have heard that keeping a track of the credit score is necessary, and here I got a good details regarding it’s importance and how to calculate the FICO score.

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Garen 2011/05/05 at 2:15 pm

Having a good credit score can help you in many ways. Employers are bound to look at you as somebody responsible.

If you are in need of inexpensive property and casualty insurance it would help if you keep a good credit score. Lenders are most likely to closely examine your credit reports if they see plenty of recent searches. Go through your open accounts and throw away those that you have no use for. Maintain the ones with the longest credit history and build on this by paying your balance on time. Do not apply for new credits until you have placed your current ones under control.

Why should you really care if you have or have a bad credit score? The answer is that it can cost you money. If you are a business owner there is a likelihood that your business insurance premium will increase as well as your interest rates. You cannot lease an office or a badly needed warehouse space because of these bad credits. Above all, in the future you cannot get a business line of credit especially when you need to expand your business.

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Mike P 2011/06/08 at 2:49 pm

You can get your score for free at http://www.creditkarma.com. No joke, they don’t have you sign up for anything. They just offer you savings on credit cards and stuff and that’s how they make their money, if you sign up for stuff through them.

I’ve been using them for over 6 months, and they email you to ask you to update your score, which is nice to get a reminder as mine has changed each month.

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Cheryle 2011/06/09 at 9:17 am

Hello Mike P

I just went to this site to get my credit score..

I am curious as to whether you have checked any other sites

This one reports 80 – 100 points higher than the 3 major reporting services

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Mike P 2011/06/09 at 10:38 am

Really? I had no idea, that’s the first time I’ve heard that. I’m pretty cautious with giving all my info and I’ve read a lot of good reviews for Credit Karma and have never really heard of another site that always offers free credit scores. Do you know of any other sites to check out? I’d be curious.

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Mike P 2011/06/09 at 10:43 am

Hi Cheryle,

I did more digging and it turns out Credit Karma uses a different score than an actual FICO score, but it’s pretty accurate. Here’s a thread discussing the details and offering another site, Quizzle I think:

http://ficoforums.myfico.com/t5/General-Credit-Topics/Quizzle-and-Credit-Karma/td-p/891506

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zia uddin09 2012/09/28 at 11:04 pm

Credit score is something that you should think about since it really matters nowadays. Owning a credit card may seem to be a good symbol status of paying things without having cash around but overusing it may hurt you and your pockets. Do not be easily tempted to do impulse buying just because you can. You might not realize it but how you use your credit card can hurt your credit score. Before you get yourself in financial trouble, be knowledgeable on different credit score tips you can follow. These credit score tips can guide you along the way to a good credit score. Here are some of the top credit score tips you can check out.

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Carolyn 2013/05/04 at 11:26 am

Knowing what impacts your credit score is important. New credit cards and inquiries can dink it. So be sure that you know what you’re getting into when that clerk at the store says you can instantly get a card and save 15% today.

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