Good Credit Scores According To The Experts – Episode #40

What is a Good Credit Score?

We take a look at what other experts, industry folks and pundits think a good credit score looks like. My opinion is that a 760 and above is a great score.

We looked at quotes from all over the internet and discuss why a great score has changed over the past 5 years.

“While it’s theoretically possible to score at 850, most scores top off at 825, you can’t get much higher” -Maxine Sweet, VP public affairs, Experian

“There is no reason to go from a 775 to an 850, because you’re going to get the same rate”
- Linda Sherry, spokesperson, Consumer Action

The median score is 723 with most lenders requiring a score of 760 to get the best rates (the highest score is 850, but only 13% of people’s scores beats 800). – Kim Langford, Kiplinger.com

Shortfalls from excellent credit, defined as a FICO score of 800, have become very expensive. Even a score of 780 can cost a rate premium of 0.125 percent. The premium on a score of 700 is about 1.125 percent, and on a score of 600 it can be a prohibitive 2.625 percent. -Jack Guttentag, Inman News, Monday, February 23, 2009.

Today, a score of 740 or 750 will get you an account but might not qualify you for the lowest interest rates – Bill Hardekopf, of LowCards.com

“FICO score over 780 is good enough” – Don Taylor, Ph.D., CFA, CFP – Bankrate.com

“780 and above- If your credit score is within this range then, it is said to be excellent credit score and lenders will have no issues in giving you credit.”

“Today, however, all of the mortgage-qualification standards have been elevated. So you would probably need a 720 or above to qualify for the best rates.” – Home Buying Institute

“Generally speaking, a score of 700 or more gets you the best credit and fast loan approvals.” – Kathy Kristoff, LA Times

“A score above 700 is considered high.” – eHow.com

“A few years ago, people could get by with credit scores of 700 to 730, no problem. Now, if you are not north of 750, you won’t get the best rate, and you may not even get a loan at all.” – Sheryl Garrett, founder of the Garrett Planning Network.

The reality is the a “great score” is a bit of a moving target. At one point is was a 720 in many lenders eyes and now some lenders are saying an 800 is the top score in many cases. Of course, the other factors are important too. Someone with a 760 is willing to put 50% down vs. an 800 willing to put down only 20% might look more attractive to the lender. Others vary in their opinion, but even if someone else likes a 720 or a 740, wouldn’t you prefer to have a cushion? One thing is certain, you must be willing to work towards a good credit score. It’s not happening by accident in most cases any more. Understanding the credit system enough to know what’s hurting your score has never been more important.

In addition, we all have a different definition of good versus great.  I tend to skew towards a this definiton a good credit score gets the best rates while a great credit score allows for lots of leeway for events.  Someone with a 760 has a good credit score as they can usually get the best rates, but someone with an 800 FICO score has a great credit score.

Credit Score Factors Pie – Lesson #2

We love the saying “It’s all about the pie”. Not this pie. Rather, it’s about the Credit Score Pie.

Credit Score Factors

Once people get their credit scores — and if you haven’t done this already you should – anyway, once they get their credit scores, they tend to look at their credit report and see that they may have a couple of items flagged for impacting their credit score. The gut reaction is to treat these all equally. Or, worse, focus on the easiest item. That’s a mistake.

The most commonly used credit score, the FICO score, is made up of 5 credit factors. Here are the 5 pieces and the percentage of the score each piece accounts for.

Payment History – 35%
Amounts Owed – 30%
Length of Credit – 15%
Credit Inquiries – 10%
Mix of Credit – 10%

The irony is that it’s really not all about the credit score pie, it’s mostly about the biggest pieces.

Payment History and Amounts Owed. These are the biggest credit score factors and nobody has a great credit score if these are out of sync. That’s because they represent nearly 2/3rds of your credit score.

Payment history is critical and as the name suggests time is your best ally to impacting this area. The key lesson is that a late payment in the recent past hurts more than one a few years ago. In fact, all your history is wiped clean after 7 years, unless you had a bankruptcy and then it’s 10 years. Net, net, if you aren’t paying on time, you have to figure out how to do this now. You can’t be late and still have a good score. Being late on payments a month before you hope to get a major loan is a no-no.

Amounts owed are all about Credit Utilization. What? A fancy term for the ratio of what you can charge – your credit limit – to what you do charge – how much of that credit limit you use. Let’s look at an example; Jack and Jill have the same credit limit on their cards, yet Jill uses her card less so she has a 25% ratio. It turns out that risk experts say people who use more of their limits are more risky. While many sources say a credit utilization ratio of 40% is fine. Someone with a 775 and higher scores tend to have about card utilization ratios in the 10% range. In short, don’t overuse your credit cards.

Mix of Credit. This wedge says that people with installment credit and revolving credit tend to be less risky than people with just one or the other and thus have higher credit scores. Installment credit examples are auto, home and personal loans. The most common revolving credit is credit cards.

Length of Credit. When it comes to length of credit just start early and stay on it. You can’t change time. If you are young, you want to start developing good habits now, so when you are ready to make a major purchase you have a few years of good credit history. Don’t cancel any credit cards with long credit histories.

There are 2 types of inquiries: Soft and Hard Inquiries. A soft inquiry is whenever you, for example, check your own credit score, or pull a credit report on your own. Soft inquiries are non-score impacting because they are not requests for new credit. Hard inquiries are requests for new credit. An example of a hard inquiry is applying for credit like getting a cell phone, or a credit card. So why do hard inquiries ding your score? It turns out that people who request credit more frequently are more risky, so the credit score reflects this.

Our experience is that most people love to focus on credit inquiries. While they shouldn’t be ignored, it’s only 10% of your score. When it comes to credit inquiries, timing is more the issue, don’t apply for credit at the same time when applying for a loan.

Also, don’t let credit inquiry fear stop you from shopping around for a loan, in most cases all credit inquiries in a 30 day window are considered as just 1 inquiry, and the industry to trying to move this to 45 days in the future. Note: this is true for home loans, but not for car loans and personal loans, so be cautious.

In summary, spend most of your effort around the biggest two credit score factors: Payment History and Amounts Owed, by paying on time and keeping your balances low.

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