What Does My Credit Score Mean?

Photo by Jeff J Mitchell/Getty Images)
Photo by Jeff J Mitchell/Getty Images)

So you have a credit score of 700 (or hopefully higher.) Great! What does this really mean? We all know a high credit score is better than a low score, but how do you know if your score is good? If you compare yourself to the average American, whose credit score falls somewhere between 687 and 689 (depending on who performed the data analysis), than a score of 700 is pretty good. However, if you want to know what type of score will render you credit worthy and also, render you eligible for lower rates on loans, you may need a bit more information.

Credit score ranges

Free Score provides a pretty comprehensive breakdown of the various credit score levels. FICO (Fair Isaac Corporation) scores are the most commonly seen credit scores out there and your FICO score runs somewhere in the range of between 350 and 850. You have other scores also, like a vantage score or plus score, that have slightly different range minimums and maximums. But, because FICO scores are used by most lenders, that’s what we’ll look at here. Here is a summary of each score range so that you gain an idea of where you stand:

500 or less: Even if you are not at the lowest score of 350, if you are in this range, you have an extremely bad credit score. This type of score results from a history of negative credit items like repeated missed payments, delinquent accounts, accounts in collections, tax liens, etc. If you went out and attempted to obtain any type of financing with a score at this level, you would likely be denied or at best (and any approval at all is a long shot), you’d receive an extremely high interest rate. A score this low may even impact certain employment opportunities.

500 to 579: At this level, your credit score is still really bad, and you likely have negative items on your credit report. But, it’s possible for you to finance a car or even obtain a loan in come cases, depending on your income and the lender. Until you are able to raise your score, you may want to hold off on borrowing to avoid the potential 10 to 20% rate (or higher) you’ll likely receive from a lender. An employer may look at this type of score unfavorably as well.

580 to 619: At this range, your score is below average and it could be much better (but hey, it could be worse too.) Depending on your income and other debt, you can likely obtain a high-interest loan or finance a car, but you’re going to be looking at really high rates. You may have a few negative items on your credit report, but you’re probably in a position where you can increase your score relatively easily by getting your budget in order.

620 to 679: Now you’re getting up there with the average American. Your credit file may need some work as you likely have some old ghosts lingering around, but you may be able to obtain a mortgage loan and other types of credit. You may have to pay rates that are a bit on the higher end, but you’re certainly better off than those in the lower score ranges. You can improve your score by getting organized, reducing credit card spending, and paying off any valid negative items on your report.

680 to 749: If you’re in this score range, your credit is pretty good. You can most likely get a home loan at a decent rate and you may also be able to refinance a mortgage. You will not, however, get prime lending rates — even if your score is at the higher end of this range.

750 and above: This is the optimal score range. Within this range lies those with either really good or excellent credit. You more than likely have no negative items on your credit report and at the higher end of this range, you will get the best borrowing rates on accounts like mortgage loans, auto loans, and credit cards.

Source: Thinkstock
Source: Thinkstock

Other factors

When determining your eligibility for credit, lenders also review your income, your other bills and debt, and possibly your employment history. This helps the lender decide if you can afford monthly payments. If you’ve held the same job for several years, this may work in your favor.

Additionally, when you’re applying for a home or auto loan, a lender will generally calculate your debt-to-income ratio. That is, the quotient of all of your total monthly debts (your home, all installment payments, and revolving debts, etc.) divided by your total monthly income. The highest debt-to-income ratio you should have is 36%. Therefore, the higher your income is, relative to your bills and debts, the more likely you are to qualify for a loan.