What is a Good Credit Score?

FinanceMortgage & Debt

  • Author Jack Newton
  • Published January 29, 2010
  • Word count 656

In today's volatile lending industry, banks are more vigilant than ever, placing a great deal of emphasis on credit scores, credit ratings, and financial history. They use these factors to determine if a consumer is a good candidate for a line of credit. In the wake of a struggling economy, many people don't have good enough credit to get the loans they need at reasonable interest rates. To help you understand the overall process, let's explore the concept of a credit score, as well as why it's so important to have good credit.

What is a Good Credit Score?

Your credit score, or credit rating, is a summary and assessment of your financial history. It includes every prior financial transaction associated with borrowing and debt—credit cards, bank loans, mortgages, debt negotiations, and even bankruptcy. In certain cases, such as children and adults who have never had a credit card or loan, it is possible for consumers to have no established credit score or credit history. Even certain types of student loans can affect your credit history.

Although the words are used interchangeably, "credit rating" and "credit score" can mean slightly different things in certain cases. A credit rating can comprise a summary of your financial history, where a credit score is a number—usually between 300 and 900—that ranks your credit standing. Some newer credit score systems score with numbers from 300 to 850, 501 to 990, or even letter grades, but these are in the minority.

Every financial institution will have a different set of parameters for determining a good credit score. For instance, a bank might be happy with 680 if you're seeking a car loan, while a sub prime mortgage lender could require 750 or above to secure the best interest rates. In general, however, a credit score of 700 or above is considered good credit.

Why is Good Credit Important?

When you have good credit, you’re much more likely to receive a variety of financial opportunities:

  • Securing Loans and Credit: Banks and other financial institutions check customers' credit scores before offering a loan, mortgage, credit card, or line of credit. A good credit score means you'll be much more likely to get the line of credit you need, while someone with bad credit is more likely to be declined for the same loan.

  • Better Interest Rates: Even if two people are offered the same loan amount, their varying credit histories could impact their interest rates. People with good credit scores receive lower rates than those with mid-range or "bad" credit. A lower interest rate can make a significant difference in the amount of your monthly mortgage payment, sometimes meaning the difference between a smaller or bigger house or impacting the desirability of the location for your new business.

  • Renting an Apartment: Landlords almost always check prospective tenants' credit scores as a way of weeding out those who might default on their rent payments and helping to ensure that they choose only punctual, paying tenants.

  • Work Opportunities: Some employers ask candidates to complete background checks before making an offer for a job—especially if the position is financial in nature. A good credit score can give you a competitive edge over other candidates if all other things are equal, while a bad credit rating could defer an offer of employment.

  • Security and Identity: Identity theft is a growing problem, with many victims only finding out that someone else has been using their name and identity when black marks start appearing on their credit ratings. Keeping a watchful eye on your credit rating will help you more easily recognize any suspicious changes. A history of good credit makes your case against the perpetrator more credible and corrections that much quicker.

Your credit rating is the scale by which your financial health is measured by banks, lenders, and employers. One of the best things you can do to protect your business and financial interests is to cultivate a good credit score.

ConsumerFinanceReport.com features an extensive article library covering a variety of personal finance issues and topics, including articles such as What is a Good Credit Score, and sections to help consumers pay off debt.

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