Good Credit

What Is Good Credit?

Good credit is a classification for an individual's credit history, indicating the borrower has a relatively high credit score and is a safe credit risk. Credit scores are provided through credit reporting agencies. Lenders check credit scores for the purpose of providing credit underwriting decisions and background check details.

Understanding Good Credit

Credit rating agencies assign borrowers a score based on their credit history, which is tracked in a credit report. Credit scoring varies according to the methods used in their calculation. The most commonly used credit score is the FICO score.

A borrower's credit score can range from 300 to 850. Credit scoring classifications are broken into five tiers: exceptional, very good, good, fair, and very poor. Borrowers with a good credit score fall into any of the top three tiers. According to Experian, borrowers with exceptional credit have a score of 800 and higher. Borrowers with very good credit have a score ranging from 740 to 799, while those with good credit have scores ranging from 670 to 739.

Therefore, borrowers with a credit score of approximately 670 or higher are considered to have a good credit score and the best chance of receiving credit approval from a lender.

The last two tiers are fair and poor. Borrowers in these two categories have more difficulty getting credit and are often charged higher rates of interest in the form of subprime loans. Borrowers with fair credit have a score of 580 to 669, while those with poor credit have a score of 579 or less.

Borrower Considerations

There are a number of steps a borrower can take to improve their credit score. Payment history accounts for 35% of a borrower's score. Any delinquent payments will negatively impact a credit score and remain on a credit report for seven years. Thus, borrowers should make payments on time and avoid delinquencies to improve their scores.

Another way to quickly improve a credit score is to reduce the overall amount owed. Total credit utilization accounts for 30% of a borrower's credit score. A borrower can quickly improve their credit score by significantly paying down existing debt balances.

While paying down debt is generally the best way to improve your credit score, another option is to request an increase to your credit limit with your credit card company. This strategy effectively decreases your credit utilization, which may improve your score. However, depending on your credit risk profile, your credit card company may not agree to an increase. If an increase is approved it is important to ensure that the additional credit is used responsibly, and does defeat the purpose by worsening your credit score.

Other factors impacting credit scores include length of credit history, types of credit used, new credit lines issued, and recent credit inquiries. Borrowers should be cautious about the new credit lines they take on and the number of credit accounts they apply for. A high number of hard inquiries in a short amount of time can negatively affect a borrower's credit score and increase their perceived risk of default to lenders.

Lender Considerations

A borrower's credit score is a significant factor influencing the type of credit for which they will be eligible. Traditional lenders generally focus on borrowers with good credit. This means they will usually consider only borrowers with a credit score of 670 or higher. These borrowers are more likely to receive loan approvals overall. They are also more likely to receive more favorable loan terms compared with borrowers with poor credit scores.