Credit Scores Explained

Your credit score follows you around for all of your adult life. It is what defines you in the eyes of financial institutions and what decides how easy it will be for you to get personal loans, auto loans and home loans. A good credit score can make life a little easier, a bad one can leave you in financial quicksand.

It’s important to understand your credit score, to know why it’s low and to turn it around if you can.

What is the Highest Credit Score?

The FICO credit score is always a three digit number and it goes as high as 85o. The higher it is, the better, but lenders work in brackets. For instance, if your score is above 720 then it will be considered “Excellent”. This is as true of a score of 800 as it is of a score of 721, although a higher score does mean it has further to fall so it’s still worth doing all you can to increase those digits.

A score of between 690 and 720 is generally considered “Good”, while a score of between 630 and 690 is considered average.

What is the Lowest Credit Score?

The lowest your credit score can be is 300, although it’s unlikely it will drop quite this far, even if you have really poor credit. Anything between 300 and 629 falls within the “poor” or “bad” range, but many lenders will still accept loan applications from borrowers with scores above 550.

How are Credit Scores Calculated?

Credit Scores Calculated

There are 5 components of every credit score. A good score is one that excels in all of these areas, but they are not weighted evenly, as shown below:

  • 35% — Credit History: The biggest contributor to your score is based on your credit history. Have you managed to meet all of you repayments on-time or have you had several defaults?
  • 30% — Size of Debt: The more debt you have had and cleared, the better your score will be; the more debt you still have, the worse it will be. There is no harm in having some credit on account, of course, but if you have stacks of cards and personal loans then it will work against you.
  • 15% — Length: The longer you have been successfully paying off your debt and meeting card repayments, the better.
  • 10% — Variety: A credit account that only has credit cards will fair worse than one that has a mixture of cards, personal loans and a mortgage. As discussed in our Repair Credit guide, it’s best to spread things around on different types of credit as opposed to many different credit cards or loans.
  • 10% — Checks: This amount is based on how many times your report is being checked. More checks mean more applications, which indicates a borrower who is struggling. This is why you will notice your credit score reducing slightly every time you make a loan, credit card or bank account application.

What Are the Three Credit Bureaus?

The three national bureaus are Equifax, Experian and TransUnion. All of these companies are in competition with one another and they all store information on US citizens. You can signup to each of them in order to check your credit report, keep an eye on your score and take advantage of the other features they offer.

The FICO credit score is a universal score used by each of these bureaus and by most lenders as well.

What is the Average Credit Score?

Highest Credit Scores

The average credit score in the United States is 687, which is just toward the upper end of “average”. The states with the highest average scores are Minnesota, North Dakota and South Dakota, while Nevada, Texas and Georgia have some of the lowest.

What Credit Score is Needed for a Car?

It all depends on the lender, but you should qualify for a car loan even if you have a credit score with the “poor” range, it just means that you will need to pay a higher interest rate.

On average, a borrower with a “poor” credit score could pay $10,000 more in interest over the lifetime of a loan on a $35,000 car, which is roughly the average cost of a new car in the United States. That’s a massive difference and a significant addition burden for someone already struggling with debt, which is why it’s worth trying to prove your credit score before you take out a big loan.

What Credit Score is Needed for a House?

The credit score you need for a mortgage will depend on the type of mortgage you get. If it’s an FHA loan then you can go as low as 580; if it’s a conventional loan then it can go as high as 620. And as with a car loan, the better your score is the better the deal will be.

What Credit Score is Needed for a Loan?

Most personal loans require a credit score of at least 580, but payday loans and other no credit check loans make more allowances in this department and rarely take the credit score into account. Of course, these loans also come with huge interest rates, ones that could cripple anyone who is struggling with financial issues.

What Credit Score is Needed for a Credit Card?

Lowest Credit Scores

You can get a premium rewards card if you have a “Good” or an “Excellent” rewards card, as discussed in our guide to the Best Rewards Cards. These cards don’t always have low APRs, but they do offer a wealth of other benefits, giving you cashback, VIP rewards and more.

If you have a “poor” credit score then you may struggle to get a decent credit card, but there are credit cards for people with bad credit out there. And if you have really bad credit then you can signup for a secured credit card. These cards essentially work as prepaid cards, requiring you to deposit a set amount of money to the card and then us this money as credit.

The way these cards differ from prepaid cards is that most lenders will upgrade you to an unsecured credit card after you have used the card for several months without issue. They may not be the sort of credit card you're looking for and they are certainly nothing like the biggest and best rewards cards out there, but they are a step towards those cards as they can help you to improve your credit score.