Credit scores are numbers ranging from 300–850 that are designed to reflect how well a person can take on, manage, and pay back loan debt.
Before credit scores, banks, landlords, and retailers relied on hearsay from people in the community to decide if a new customer was likely to pay back a loan. However, because of prejudices like racism and sexism, this communal system was anything but fair. Before 1989, many hard-working people were denied a loan just because of the way they look.
Modern credit scores were designed to equalize the playing field, giving everyone a fair chance at accessing favorable loans. That’s the idea, at least. Critics feel that the modern credit score is imperfect; after all, it is much easier for wealthy people to have excellent credit when compared to poorer people. Regardless of the ethics, credit scores are an improvement on the old prejudices, and they’re here to stay.
Good and Bad Credit, by the Numbers
The United States uses the FICO credit score system, which rates a person’s credit on a scale from 300–850. It uses an individual’s payment history, debt-to-income ratio, and length of credit history to calculate whether they have poor, good, or excellent credit.
There are three broad categories of credit score:
- Less than 580: Poor Credit
- 580–670: Good Credit
- 700 or more: Excellent Credit
Your credit score can have a significant impact on your financial future. For the best credit card perks, interest rates, and rental approval ratings a good credit score is your lifeline.
Why Good Credit is Important
Think of your credit score as a measurement of how much you can buy at one time. If you just want a new credit card with a lower credit limit and decent perks (e.g. 1% cashback, a few thousand flight points), a decent credit score of 580+ should get you there. However, if you want a credit card that can take on huge purchases (think upwards of $30,000), you’ll need an excellent score of 700 or more.
These are just a few of the perks of a good credit score:
Lower interest rates: The interest rates paid on a mortgage, business loan, or credit card are lower for people with good credit. Consider a 30-year mortgage of $200,000. A person with a credit score of 760 might get an APR of 5.123% and pay $193,341 in interest, whereas a person with a 620 credit score might get an APR of 6.721% and pay $265,604 in interest. While it may sound small, that 1.6% APR difference means the higher-credit individual saves over $73,000!
Higher credit lines: Credit card companies, banks, and other lenders will entrust higher credit maximums to people with good credit scores. If you want to make a large purchase like a new car, you have a much better chance of getting accepted for an auto loan if you have strong credit.
Better credit cards: The higher your credit score, the more a credit card company will want you as their customer. To woo big spenders, credit card companies create high-quality credit cards that offer large cash-back percentages, flight points, access to exclusive restaurants, and offer deals on retail or grocery shopping.
Superior renting options: For the best chance at renting the place of your dreams, a good credit score is your best friend. Landlords check an applicant's credit when deciding to accept or deny their application. A strong credit history shows that the applicant is less likely to skip a rent payment.
Start Improving Your Credit Score
If you’re struggling to pay back any unsecured debts (medical, credit card, or personal loan debts) and miss a payment entirely, your credit score can drop significantly.
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