Good credit, or a good credit score, means having a history of on-time payments, no defaults, and generally good financial practices. This will result in a good credit score, which will allow you to qualify for more credit and loan opportunities.
What is Good Credit?
Every person has an individual credit history that’s made of different components, such as credit score and aspects of your finances that show how well you can manage your income, investments, expenses, etc. In other words, if you have a good credit history, your outstanding debt is typically not too high, and you have not been late with paying your bills or installments for previous debts.
Today, good credit usually equals a good credit score because good money management practices lead to having a good to excellent score. If, in the past, you have promptly paid off your debts and bills, and you have not had any missed or late payments, your credit is most likely good.
Having good or exceptional credit makes you a trustworthy candidate when you’re applying for new credit cards, a mortgage, and personal or other types of loans. If your credit is good, you will probably be able to get a loan at favorable terms that will easily fit into your budget.
Most lenders, whether they are banks, credit unions, or alternative and online lenders, will check your credit before they approve you for a loan by ordering a credit report from one (or all) of the credit bureaus. They will then determine whether your credit is good enough to offer you a loan.
Achieve and maintain good credit by making timely payments and avoiding additional interest charges and penalties that come with being late with a payment.
What Is the Opposite of Good Credit?
Your credit history includes several aspects of your finances, including the accounts you have open and for how long you have had them, the number of new credit inquiries you may have made, the amount of credit you have available and the amount you have actually used.
If you have not been able to manage your bills and debts appropriately, your credit score is likely to drop. For most lenders, when it falls below 620 on the FICO scale it is considered “bad credit” and you are no longer considered a trustworthy candidate for a loan.
If your credit score is bad, you will probably be offered more unfavorable terms when attempting to borrow money. Interest rates are typically higher, the total amount of principal you can borrow will be lower, and you might need to back your loans with collateral.
Collateral gives your lender assurance that they will not be at a loss if you fail to pay off your debt. It is an asset of yours they can claim as compensation for the money you borrowed but did not repay.
Note that having no credit can be as unfavorable as having bad credit. Having at least some credit shows your potential lender, landlord, employer, etc. that you can manage your payments properly. If they have no proof that you are responsible with your money, they can turn down your application.
The Benefits of Having Good Credit
Investing time in learning how to budget properly can pay off in multiple ways. First of all, it will allow you to organize your finances, so you never fail to pay a bill or a loan installment on time. This will, consequently, lead to having good or exceptional credit, which helps if you need to take out a loan.
When you start your application knowing your credit is good, you will not be wondering if you will be approved, but how much your monthly payment will be and where you can get the best interest rate. How can you benefit from having good or exceptional credit when you are applying for a loan? These are some of the advantages you can expect compared to those with poor credit.
- You do not have to take the first offer a lender gives to you. You can negotiate and get more favorable terms.
- The overall cost of your loan will probably be lower when your credit is good. You will qualify for the best offers, which include lower charges and interest rates.
- People with good credit do not usually need to pay security deposits related to utilities or mobile phone plans.
- When you apply for a loan, your borrowing capacity will be greater. The lender will be willing to lend you more money when you are not a risky client.
- If you apply for a personal loan, you are more likely to get an unsecured, or a signature loan, which means you are not required to back your loan with collateral.
- Your car insurance will probably be less expensive if your credit is good, as people with good credit usually file fewer claims.
- If you want to rent an apartment, your good credit may help the prospective landlord decide in your favor.
- Some employers will ask to see your credit report, with your permission, of course, so having good credit may even help you get a job.
What Is a Credit Score?
Basically, your credit score is a number that represents your credit history. The higher the score is, the better your credit is, and the better candidate you are in the eyes of lenders.
The Fair Isaac Corporation created the most popular credit score scale. It’s widely used over the U.S. to determine how well you have managed to pay your bills and debts in the past and whether or not you make a good loan candidate.
The FICO score consists of several categories, and each of them contributes to the overall score by a certain percent.
- Your payment history makes 35% of your FICO score.
- The amounts owed make 30%.
- The length of your credit history is 15%.
- Your credit mix and new credit are both 10%.
What do these categories mean? Payment history involves all your credit accounts and determines if you have paid each one on time. The amounts owed include your overall current debt, but note that more debt doesn’t necessarily mean a lower credit score. It all depends on your credit limits.
The length of credit history refers to the amount of time you have had certain credit. Generally, the longer, the better, but short-term credit does not necessarily impact your credit score greatly. Credit mix means you have different credits, such as a personal loan, a few credit cards, a mortgage. New credit means you have recently opened a new account. If there are too many of them, you may be considered a risky candidate.
What Is a Good Credit Score on the FICO Scale?
On the FICO scale, credit scores rank from poor to exceptional. Anything lower than 580 is considered poor. If you’re in this category, you are unlikely to get a loan, but there are ways to improve your credit score in a reasonable amount of time.
A credit score between 580 and 669 is considered fair, and anything between 670 and 739 is good, while credit scores between 740 and 799 are considered very good or excellent. People with a credit score above 800 (exceptional) get the best offers and very favorable terms.
During the second quarter of 2019, the average credit score in the U.S. was 703. In the last couple of years, it has been trending upward. People who are 60 and older have the best credit score, according to Experian, while people in their twenties are among those whose credit score is the lowest.
How to Maintain a Good Credit Score
If you want to keep your credit score good to get more affordable terms when applying for a loan, start with keeping track of all your accounts, debts, bills, and any payments. Writing down everything you need to pay, or using an app to organize your finances, is a good way not to let an honest mistake ruin your credit score.
Paying your rent or mortgage and your bills should be a priority. These payments may end up on your credit report if you are late, so make sure you always include these in your calculations. You can always cut down some other expenses to make sure you do not fall behind with the ones you cannot postpone.
Applying for new credit can do the same. If you need to apply for a personal loan, do not conduct too many inquiries at once because your credit score will be affected, and so will your chances of getting the application approved.
When it comes to credit cards, there are several things you can do to help your credit score. First of all, never close a credit card even if you stop using it. It prolongs the length of your credit history and, therefore, your credit score. Also, try not to keep the balance on the credit cards you are actively using too close to the limit because this can negatively affect your credit score.
Also, make sure you monitor your credit report. You are entitled to one free report per year to keep track of your credit history and credit score. Double-check all the information on the report because of any errors.
If you are currently looking for employment, have been a victim of identity theft, there was an error in the previous report, you have been rejected for new credit, or you are living on welfare, you also have the right to order a free report.
Where Can I Check My Credit?
Today, you have the option of ordering a credit report online, which works faster than requesting one over the phone or by mail. Just visit annualcreditreport.com (and this is the only valid version of this website—beware of potential scams) and type in your name, address, date of birth, and your social security number. You will have access to your report in a couple of minutes.
If you choose to order your report over the phone or via mail, you will need to wait around 15 days.
The Bottom Line
Maintaining good credit should be an essential part of your budgeting habits. It does take some planning, but it pays off if you are ever interested in buying a home or taking out a personal loan.
If you currently have bad credit, do not worry because there are ways to rebuild your credit score. Also, the negative information will disappear from your credit report after seven years.
Building and monitoring your credit score may not be the easiest thing to do when life is full of unpredictable situations and our lifestyles tend to be so busy, but it will potentially ease your mind to know that you are a good candidate for a loan, whenever you may need it.
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