What Is A Good Credit Score Important?

Many young people ignore their credit score because they believe it is not important until later in life. However, they do not realize that their credit score can significantly impact their financial life, starting as early as their late teens. 

Your credit score represents your creditworthiness. In other words, it will show lenders how likely you are to repay your debts on time. 

Your score affects your ability to qualify for installment loans such as auto loans, student loans, and mortgages. It also affects your ability to get approval for revolving credit, such as credit card debt. In addition, credit scores will impact the available credit limit and the interest rate that lenders will be offering you.

When you hear lenders say you have “good” credit or “bad” credit, they refer to different credit score ranges. Understanding the different ranges will help you assess whether your score needs to be improved. A “good” credit score is an important factor in your financial life.

This article will discuss what a credit score is, how it is used, and why it is important. It will also explain the different types, what a good credit score is, and what factors affect your score. Finally, it will show you how to improve and monitor your credit score.

infographic that explains what a credit score is, why do you have more than one credit score, what is a good credit score, how to improve your credit score, how to establish credit if you do not have credit, and why is a good credit score important.

What Is a Credit Score and How Is It Used?

Your credit score is a 3-digit number that rates your creditworthiness. It helps creditors determine whether to give you credit, what interest rate they will charge you, and the loan terms they will offer. Each person has their own credit score. If you’re married, both you and your spouse will have an individual score. When applying for a loan together, such as a mortgage, both scores will be evaluated.

Most banks evaluate an applicant’s credit score to determine if their loan application, new account application, or other lines of credit should be approved. For example, credit card companies assess applicants’ credit scores and credit histories before approving a new credit card. In addition to financial institutions, other companies can request a credit report from you to determine if you are trustworthy. Companies like home rental agencies and insurance companies often pull credit reports on potential customers. Even employers might require a credit report before they offer you a job.

A high credit score indicates to lenders that you are not a big risk and are likely to pay back your loan on time, while a bad credit score indicates that you are a risky borrower and that there is a fair chance that you will default on your loan.

Having a high score will benefit you in many ways. It will make it easier for you to get a loan, pay lower interest rates, rent an apartment, and lower your insurance rates. A bad credit score might get your loan application denied, and your rental application denied. If you have bad credit and are lucky enough to get approval for a loan, it will certainly be at a higher interest rate and a lower limit.

Banks and lenders usually request a full credit history on potential loan applicants and not just a credit score from one of the 3 major U.S. credit bureaus (Experian, Equifax, and Transunion). These credit agencies collect, report, update and store consumers’ credit information in the form of a credit report. A full credit report is a detailed history of a consumer’s bill payment activities, loans, current debt, and other financial information. 

Credit bureaus get some of their information from creditors, such as banks, credit card issuers, or auto finance companies. They also get information about you from public records, such as court or property records. 

Reporting credit information is voluntary, and there are strict guidelines on how to do it. Many creditors choose to report this information because information about consumers’ past credit habits helps them decide who to give credit to. Consumers do not have to permit creditors to report credit information to a credit bureau. However, under many circumstances, creditors are required to get your written consent to pull your credit history. 

Credit reports can be very lengthy, complicated, and can take a long time to evaluate. Thus, evaluating a credit report is not an easy task. It is easy to misinterpret information or completely miss some warning signs when assessing a credit report. 

Besides, banks, lenders, insurers, and credit card issuers do not have the time to evaluate each applicant’s credit report fully. That is why Fair Isaac Corporation (FICO) came up with a credit scoring model that uses information from a person’s credit report to calculates a person’s credit risk. This risk level gets summarized in a 3-digit credit score that gives lenders a good picture of a consumer’s trustworthiness.

Credit scores, on the other hand, do not require time-consuming evaluation. Instead, the lender only needs to look at the number to determine the reliability of the individual. 

Why Are My Credit Scores Different?

Credit scores change continuously because most credit-related financial transactions will impact a person’s credit score. 

There are 2 companies that generate the 2 main credit scoring models used in the U.S. FICO generates the FICO score, and VantageScore Solutions generates the VantageScore. Both scoring models use somewhat different criteria to determine your scores, and that is why your scores from each company can be slightly different.

Your credit score can also vary depending on the credit bureau it was issued by. Not all credit agencies have access to the same information as they cannot share the borrower’s confidential information. For example, some lenders might only report their payment records to one of the credit bureaus instead of all 3. 

Your credit scores might be different because different lenders use different types of credit scores for different purposes. 

Both FICO and VantageScore have created different versions of their scoring models to cater to different lenders. For example, they offer specialized reports to credit card issuers, car loan lenders, and mortgage lenders. For example, a FICO Auto Score might put extra weight on a missed car payment. Although this missed payment will also show up in the normal FICO score, it might be weighted differently.

Though your scores may vary, they’re all based on the information provided by the credit-reporting agencies. Therefore, it is essential to periodically check your credit reports and make sure it is correct. This will help you build a solid credit score across the board.

While each of these scoring models and credit bureaus calculates your credit score using their own algorithms, they all focus on showing lenders how responsible you are in paying off your debt on time.

What Is a Good Credit Score and What Are the Credit Score Ranges?

Lenders request your credit history and score from all 3 bureaus to get a clear picture of your payment records. Your credit score’s main purpose is to assess the risk lenders are taking on you and predict if you are reliable to make your loan payments with interest on time.

Creditors often use your credit score to set the interest rate that you will be charged for a loan. The higher your credit score is, the lower the interest rate you will be charged. However, if you have bad credit, you might not get approved for the loan. If you do get approved, you will be charged a higher interest rate for the increased risk the lender is taking on you.

The most commonly used credit scoring models, FICO and VantageScore, use a credit score range between 300 and 850, with 300 being the lowest and 850 being the highest. Lenders will use their own standards as to what score is acceptable to them. However, here are the official credit score ranges and their ratings for both FICO and VantageScore:

FICO credit score ranges are:

  • Exceptional: 800+
  • Very Good: 740 to 799
  • Good: 670 to 739
  • Fair: 580 to 699
  • Poor: 579 and below

VantageScore credit score ranges are:

  • Excellent: 781 to 850
  • Good: 661 to 780
  • Fair: 601 to 660
  • Poor: 500 to 600
  • Very Poor: 300 to 499

Although both scoring models’ ranges are slightly different, if you have an excellent FICO score, your VantageScore is likely to be excellent as well.

Applicants with excellent or very good to good credit scores will receive the best rates and above-average rates from lenders. In contrast, applicants with a fair credit rating may be approved for credit but likely not at competitive rates. Applicants with a poor rating may be required to pay a fee or deposit and pay high interest rates. Most applicants with an inferior credit score will often not get approved for credit at all.

Factors That Affect Your Credit Score

Infographic that explains what elements make up your credit score. 35% is made up by your payment history, 30% by the amount you owe and your credit utilization ratio, 15% by the length of your credit history, 10% by new credit, and 10% by a mix of credit.

Your credit score plays a significant role in establishing your credit profile. Most people know that on-time loan payments, credit card payments, and other bill payments have a great impact on your credit report and your credit score. However, some payments are weighted more heavily on your credit score than others.

Contrary to what people believe, multiple credit accounts do not harm your credit score. In fact, it shows the amount of experience you have in handling different types and multiple lines of credit.

Let’s take a look at the main factors that affect your credit rating and score in a significant way.

1. Payment history – Your on-time payment history is the most crucial component of your credit record and counts for 35% of your credit score. Paying your bills on time will help keep scores high. One late payment on a loan can be a costly mistake. How costly will depend on how long ago the late payment was, how severe the late payment was, and your credit score and history. 

According to FICO Consumer Credit Activity, a recent single 90-day late payment can cause as much as a 130-point drop in a FICO score for a person with an excellent credit score. The better your credit, the more you may feel the punishment of late payments. A missed payment stays on your credit report for up to seven years from the date it occurred.

2. Amount of debt/credit utilization levels – The credit utilization ratio is the amount you owe relative to your credit limit. It is the second most important component of your credit score. In the FICO scoring model, it accounts for 30% of your credit score. Therefore, the general rule of thumb is to keep your credit utilization ratio under 30% of your credit limit. Of course, the lower is better. 

You can also increase your credit limit to bring your credit utilization ratio down. So, if your credit utilization rate is high and you lower it significantly, you should see an increase in your credit score soon afterward.

3. Credit history length – It is better to have a long credit history as it provides the bureaus with more information about your credit records and your debt payment activity. It counts for 15% of your credit score. Your credit history includes the length of time your credit accounts have been open and when they were last active. That is why it is not a good idea to close older credit card accounts because it will shorten your credit history, which can negatively affect your credit score.

4. New credit – New credit only accounts for about 10% of your credit score. Opening up multiple new credit accounts in a short time period is not a good idea and can raise a red flag. It might suggest that you are facing financial difficulties and are a riskier borrower. The fewer recent credit inquiries you have, the better.

Besides the suspicion that you might have financial troubles, opening new accounts and new lines of credit requires new credit inquiries. These are hard inquiries or hard pulls, and they will decrease your credit score by a few points. In addition, several hard inquiries in a short period can lead creditors to consider you a higher-risk customer. Therefore, it is important to limit the number of hard inquiries in a short period.

Hard inquiries typically stay on your credit report for about two years. However, often they only affect your credit score for one year.

5. Credit mix – Lenders want to see that you can handle and pay back a mix of different types of loans. Therefore, it might be a good idea to consider diversifying. A good mix of accounts can include installment loans such as auto loans and mortgages, and revolving lines of credit such as credit cards.

How To Monitor Your Credit Score?

You can use credit monitoring services to check your credit score. These services help you with issues with your credit report. In addition, credit monitoring can help avoid identity fraud. It isn’t easy to review a credit report that lists all your credit transactions for the fiscal year. As a result, there is a chance you might miss the errors or fraudulent activity.

Credit monitoring enables you to get updates regularly. It is easier to detect the errors when you receive alerts every time a new transaction shows up on your credit report. Based on these records, you can contact the credit bureau to rectify the errors if necessary.

As there are 3 credit bureaus providing credit reports and credit scores, you must monitor your credit history at all 3 bureaus. This is important because the information each credit agency receives is not the same. Fortunately, the federal Fair Credit Reporting Act (FCRA) requires that U.S. consumers get a free credit report annually at annualcreditreport.com. However, credit bureaus aren’t required to provide free credit scores. 

Free credit scores are hard to find. Many companies advertise free scores but then plan to charge you sooner or later. They will want you to sign up for a trial offer and pay a subscription fee. However, you can cancel the subscription. Many people are not comfortable doing that because you do have to provide them with personal information. 

You also might be able to get your scores for free from your credit card company or companies like Credit Karma or Credit Sesame. Another way to get your credit score is directly from the three main consumer credit bureaus. However, they may charge you a fee.

Remember that a credit score is a snapshot. Each time you check it, the score might be slightly different because updates are done regularly. Thus, credit scores are not part of your credit history. Your credit score is only calculated when your credit score is requested by a lender or another person or business who wants to check your creditworthiness. 

How To Improve Your Credit Score?

Past payment performance is taken into consideration as a good predictor of future payment performance. That is why your credit score on your credit report often provides enough information to a creditor to know whether you are trustworthy and are likely to pay your bills on time.

As mentioned before, there are quite a few factors that can reduce your credit score. The good news is, there are also many ways to improve your score and increase your chances of getting a loan. 

It is important to know that your credit score will not improve overnight. The time it will take to raise your credit score depends on why your score needs to improve. For example, if your score is low or you do not have a score because you do not have enough credit history, your score can be raised within a few months.

If your score is low because your debt is too high or you have delinquent payments on your account, it will take significantly longer to raise your score. In addition, raising your score to a healthy level can sometimes take years in case of collections and bankruptcies.  

1. Pay your bills on time

Collections and delinquent payments, even payments that are only a few days late, will significantly impact your credit score. This is because your bill payment history is responsible for 35% of your credit score. Therefore, if you have missed a payment, it is crucial to get current on your account asap. In addition, start paying your bills on time. Making a budget, signing up for payment reminders, and setting up automatic bill payments will help you pay your bills on time.

Recent records affect your credit scores more than the older payment history. Late payments affect your credit score for up to 7 years. However, its negative effect will decline over time as soon as you start to pay these bills on time. Please note that collections and bankruptcies will stay on your account for 7 years. So, try to avoid those at all costs.

2. Decrease the amount of your debt and your credit utilization ratio

The credit utilization ratio is calculated by adding the balances on your credit cards and dividing this number by your credit limit. This ratio is responsible for about 30% of your credit score. In general, the total balance on all your credit accounts should not exceed 30% of your credit limit. The lower the credit utilization ratio is, the better. 

Reducing your credit utilization ratio will increase your credit score. One way to do that is to request an increase in your credit limit. If your account is in good standing, your request will most likely be approved. Just make sure not to start spending more.

Avoid closing unused credit cards, as this will increase your credit utilization ratio. In addition, it might also reduce the length of your credit history if it concerns an older card. Both will reduce your credit score.

A low credit utilization ratio shows lenders that you know how to pay your bills on time and manage your outstanding debt responsibly. 

3. Regularly check your credit reports for errors

It is essential to regularly check your credit reports from all 3 agencies. It is the only way to determine if your credit score has declined due to errors in the report. If you notice any wrong information or omitted transactions, you need to file a dispute with the reporting agency and the lender to get the mistakes fixed asap.

Credit bureaus offer a free credit report to their customers every year. It is absolutely free, and it is not counted as a hard inquiry but a soft inquiry. Luckily, a soft inquiry does not affect your credit score. 

How To Establish Credit If You Don’t Have A Credit Score?

It is essential to understand that having no credit is not the same as having bad credit. Bad credit means that you borrowed money and did not pay it back on time. People with bad credit have a hard time getting loans because creditors do not trust them to pay back their loans on time.

Having no credit means that you do not have a credit history, and without a credit history, you cannot build credit. Unfortunately, most young people have no credit history. This makes it hard to open a credit card or get a loan. Luckily there are some ways to build credit when you are just starting out.

Become an authorized user on someone else’s credit card – You can apply to be an authorized user on a family member’s or friend’s credit card. This is the easiest way to establish credit. First, use the card regularly and make sure you keep track of how much you spend. Also, set up a payment plan with the card’s owner to ensure that you pay your debt on time. It is crucial that the card owner is responsible and has a good credit standing because their late payments on that card will appear on your credit history and make it difficult for you to establish good credit.

Apply for a secured credit card – To get approved for a secured credit card, you have to make a security deposit in the amount of your credit limit. So, basically, it is a prepaid card that you can use as a credit card. Your total debt and payment habits will build your credit history and credit score.

Request credit for utility and rent payments – Another way to build credit is to ask your utility company and landlord to report your payment history to the 3 credit bureaus. This will help you start building your credit history.


A good credit score can save you a lot of money. It will help you qualify for lower interest rates and better terms on car loans and mortgages. It might also lower your insurance rates and even get you approved for your dream rental apartment. 

Realizing that your credit score can significantly impact your financial future, you must establish and maintain impeccable credit habits at all times. This means always paying your bills on time, not opening too many credit cards, keeping a low credit utilization ratio, and regularly monitoring your credit scores and credit reports at all 3 credit bureaus.

An excellent credit score is what everyone should be striving for. Remember that scores fluctuate. As long as you keep it in a healthy range, your credit score will make your financial life a lot easier.

Vikram R
Vikram Raghavan is a value investor, technologist, and Finexy co-founder. In addition to stock market investing, Vik also invests and advises startups on growth marketing and product management. Vik's work is focused on themes of marketplaces, micro-entrepreneurship, marketing automation, and user growth. Previously, Vikram led product and growth teams at Overstock.com, focusing on efforts across acquisition, new user experience, churn, and notifications/email. He holds an MBA in Finance from Temple University and a B.S. in Computer Information Systems and Finance from Bemidji State University.