Perhaps the most common question I hear when it comes to credit is, “What is a good credit score?”
Unfortunately, it’s a bit of a loaded question because the numerical value tied to your credit file is a bit shortsighted, if not semi-useless. Yeah, I said it. Credit scores are somewhat useless, at least numerically speaking.
Sure, there are credit scoring tiers, or thresholds, which certain banks and lenders require for approval of a loan or a credit card, or to set interest rates, but they’re inherently flawed.
On the surface, 720 may be considered a “good credit score.” It’s relatively high in the FICO score range, but what’s actually behind that seemingly good credit score? Let’s find out!
A Good Credit Score with No Payment History
Here’s where things get more complicated; a consumer with very little credit history may have an excellent credit score because they tend to have squeaky clean records, no lates, no charge-offs, no derogatory accounts, and no outstanding balances. Sounds pretty good, right?
Unfortunately, these same consumers may not have much in the way of positive payment history either, so their seemingly good credit scores don’t carry much weight. Sure, they may have never been late, and they may not have any credit card debt, but they also haven’t proven that they can carry heavy debt loads and subsequently pay those debts off. Were they ever on time?
Conversely, a consumer with what may be known as an average credit score, say 680, could have a much deeper credit history, with plenty of tradelines and years of building credit. At the same time, they could have something holding them back, like too much outstanding debt or too many recent credit inquiries.
This is where credit scoring gets put to the test, because the three-digit number alone may not tell the whole story. And creditors should know this, and dig deeper before judging someone on a simple numerical value.
Consider this example of a good credit score:
Say two prospective borrowers come to you for a car loan. Both need $1,000, but their credit profiles (and credit scores) are quite different.
Borrower A: 30 years of excellent credit, $10,000 in outstanding debt, 680 credit score
Borrower B: 1 year of perfect credit history, $250 in outstanding debt, 730 credit score
In the above example, assuming you were the bank, who would you want to lend your money to?
The borrower with 30 years of excellent credit history and thousands in existing debt, or the borrower with a single year on the books and very little outstanding debt?
Personally, I think I’d go with Borrower A, who despite having a lower credit score, which may not be considered as “good,” has a greater propensity to pay me back, proven by their decades of credit usage.
This is why credit scoring thresholds don’t work, even though they are common in the world of mortgage lending. Awarding borrowers for being over pre-set credit score thresholds is a fatal flaw, and one that has led to serious problems, as those who had no real history of supporting large debt loads were granted loans based on a simple three-digit score.
So before you think you’ve got a so-called good credit score, look at what’s behind that number before assuming you’re good to go.
The Blackjack Analogy
When I think about what makes up a good credit score, an analogy comes to mind. Think of the game Blackjack, where you bet against the dealer’s hand.
Ideally, you’d like to get 21 or 20, but a lot of times you can win with a 16, 17, 18, 19, or even lower. And that’s because the key to blackjack isn’t getting 21, but rather beating the dealer’s hand or letting the dealer bust.
The same mentality is present in the credit scoring realm, where consumers yearn for excellent or perfect scores over 800. I guess you could consider a score of 800 or above blackjack, but the reality of the situation is that you don’t need a perfect score to win.
Generally, FICO scores of 720 and above are considered good credit, and anything higher will do little more than stroke your ego.
Also, let me point out that credit scoring companies such as FICO do not determine what’s good and what’s bad. That’s up to individual lenders and creditors to decide.
If you were to ask FICO what a good score would be, they’d balk at the idea. They’d simply tell you where you stood relative to the average score.
While certain credit scores may lead you to think you have bad credit, average credit, good credit, and so on, credit scoring really just attempts to measure the likelihood of default, which is defined as being 90 days or more past due on a credit obligation. So it’s really just a likelihood score.
In the past, VantageScore had credit grades that made it more clear where you stood on their scoring range, but they seemed to ditch that concept. Perhaps because the notion of assigning a letter grade is somewhat misleading.
The Good Credit Score Takeaway
In any case, it’s important to remember that a so-called good credit score doesn’t guarantee credit card approval for a number of different reasons.
For one, there are often other qualifying factors, such as your employment and income. Why do you think credit card issuers ask how much you make, or what you do?
Even if you have awesome scores, you need money to pay credit card bills.
Creditors also have the ability to scour your credit reports to make sure your scores are representative of the credit risk you present.
If you have too many open accounts (or too much outstanding credit) with a given credit card issuer, they may deny you on subsequent requests, regardless of how good your score is.
Additionally, individual issuer rules, such as 5/24 from Chase, will lead to a denial even if you have the best credit in the world. So be warned.
That being said, I still characterize credit scores of 700 and above as good, though as the average credit score rises, you’ll need to do better. So always aim higher!
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Nice analogy. Like you said, it doesn’t need to be perfect to be good.
It’s a good point about a good score not being the be all end all. Just look at the 5/24 rule. You can have “good credit” but still get denied for a Chase credit card…
But how do you get a good credit score?