What Is a Good Credit Score?

A lot has changed with credit scores in the last few years. Both the credit repositories, and the companies who use them, are redefining credit scores as a result of the financial meltdown. The credit scores that were valid three or four years ago may no longer be. That raises the question: What is a good credit score?

Part of why it can be difficult to get a straight answer to this question is quite simply that there are several different credit scoring models floating around out there. Some are actually used by real lenders, while others are put out there mainly for public consumption. And then there may be different credit scores that apply to different industries, and even various companies within those sectors.

Confused? If you are, then you’re starting to get a grasp of what’s going on. Call it Mass Credit Score Confusion.

All credit scores are not created equal: FICO vs. FAKO

FICO scores, a product of the Fair Isaacs Corporation, are the lending industry standard in credit scores.

For this reason we can say that your FICO score is your real credit score – the only one that will count for lending purposes.

FICO scoring is used by each of the three credit repositories – Experian, Equifax, and TransUnion – though each has an internal “brand name” for its own version. There are no significant differences between each of the three versions, if there are any differences in all.

Though there can be substantial differences in credit scores from each of the three repositories, this usually owes either to timing differences in the reporting of information by individual creditors, or the fact that creditors may not report to all three repositories.

Are you still confused? It only gets worse from here!

FAKO refers to any credit scores that are not FICO. Vantage Scores are among the most popular FAKO scores. They represent a partnership among the three credit bureaus, and include:

1. TransRisk from TransUnion (scored on a 300 to 850 point scale),
2. Score Card from Equifax (280 to 850), and
3. ScorexPLUS from Equifax (360 to 840)

While the scores generally track actual FICO scores, they won’t be an exact match. However, having access to these scores will at least enable you to have a general idea what is going on with your FICO scores. Significant increases or declines in your Vantage Scores can tip you off that you are either heading in the right direction, or that you have some credit issues you need to take care of.

Other FAKO scores.

The explosion in “free credit score” providers has increased the number of options based primarily on FAKO variants. Though subscribing to these services will enable you to see the ups and downs in your scores, it is important to understand that these are not the credit scores used by lenders. Not only are the scores not real, but they’re not necessarily free either. Most of them will enable you to get your score on a regular basis if you subscribe to their service.

Examples of these services include Quizzle.com, CreditKarma.com, and MyFico.com. Each uses a different scoring source, which may even be legitimate. For example, CreditKarma’s credit score comes from TransUnion. Though that may be only one of the three credit repositories lenders use, the score you will get will be accurate – at least as far as TransUnion goes.

MyFico takes it a step further, and uses two credit scores: TransUnion and Equifax. Now whether any of these credit scores that are drawn from legitimate credit repositories are the ones that are actually used by lenders is subject to debate. They may give you an actual FICO score, but it’s also likely that you’re getting a Vantage Score.

Once again, if you’re concerned with the relative level of your credit score, any of these FAKO sources can help you stay on top of that. Just remember that whatever credit score you get from these sources is unlikely to be your actual credit score for borrowing purposes.

The danger of relying on FAKO credit scores

There is a general consensus that the scores you get from FAKO sources are calculated on the high side. They tend to be higher than what your actual FICO scores are – sometimes as much as 100 points higher. This can create serious problems if you are about to apply for a loan based on your knowledge of a FAKO credit score.

Let’s say the lender requires a minimum score of 680 in order to make a loan. Armed with your FAKO score of 720, you may go into the application confidently, reasoning that you have excellent credit. But when the lender pulls your actual FICO score, it comes back at 655.

Not only do you not have excellent credit, but you will not get the loan you are applying for either. This is the downside of relying on free credit scores and their FAKO scoring models.

Is it possible that FAKO credit scores might be intentionally inflated in an attempt to draw more consumers to free credit score schemes? As the saying goes, you’ll win more bees with honey than with vinegar. Maybe the extra 30 to 100 points that FAKO scores typically have is the “honey” of free credit score offers. I’m just sayin’…

Residential Mortgage Credit Reports – The Big Kahuna of the Lending Universe

The Residential Mortgage Credit Report, or RMCR, is probably the standard in both credit reports and credit scoring. If you have never heard of this type of credit report before, that’s probably because they’re used primarily by the mortgage lending industry and are not well-known by the general public.

The report contains the most accurate information available in regard to both credit and credit scores. It is what is commonly referred to as a “triple-merged credit report”, or simply as a tri-merged. “Triple” refers to the fact that credit information and credit scores contained in the report are drawn from all three credit repositories – Experian, Equifax and TransUnion.

Each credit repository supplies an actual current FICO score in the report, as well as any and all credit data available in their system .The “merged” part in the name of the report refers to the fact that duplicate information between the three repositories is removed. This provides a “clean”, easy-to-read report.

The mortgage lender will look at all three scores from each of the repositories, and take the middle of the three scores as your credit score for lending purposes. If for example, your scores are 752, 724 and 667, the lender will use 724 as your score. And for what it’s worth, a variation to that degree is pretty normal!

Still more confusion: Different FICO models for different industries

In theory, the FICO model is a standard one that can be used under different circumstances. However, there are slight variations in the models used for each industry that access the scores.

In general, this is the rough formula that is used in calculating FICO scores:

1. 35% Payment history on loans and credit cards.
2. 30% How much of your available credit you are using.
3. 15% Length of your credit history.
4. 10% Recent credit inquires.
5. 10% The types of debt/credit that you have.

Those numbers look nice and pretty, and add up nicely to 100. But according to the credit repository websites, the numbers above are actually more of an average of the range for each category. But let’s go with these numbers because they’re easy to read, and widely in circulation.

Beyond the breakdown above, various industries may give different weight to credit events within each category. For example, the mortgage credit scoring model (known specifically as the FICO 8 Mortgage Score) will give heavier negative weight to a late mortgage payment. The scoring model for auto lenders will give greater negative weight to late auto payments.

This makes perfect sense, since each industry has a very different specific focus. Yes, a mortgage lender may be concerned that a borrower has made late car payments in the past, but they’re a lot more concerned if the same borrower has a history of late mortgage payments. After all, mortgage lending is what a mortgage lender does.

The bottom line is that your FICO score for a Residential Mortgage Credit Report may not even the same as the FICO score that came up when you applied for an auto loan or credit card.

Credit scores are a moving target

This point alone makes a compelling reason for staying on top of your credit scores on a regular basis. Your credit score is not a fixed number – it actually changes continuously. It can change day-by-day, or it could even sit in one place for a month or more. It can rise 20 points one week, but fall 80 points the following week.

How does that happen?

Your credit score is a composite calculation of your credit payment history, the amount of debt you have outstanding, the number of credit lines you owe money on, public records information, the type of loans that you have, and even new credit lines you applied for. (Contrary to popular belief, it does not factor in information such as occupation, income, home value or investment assets owned.)

Each of these items changes on an ongoing basis. For example, if you go to Best Buy and purchase a widescreen TV for $1,000 on your Visa card, the amount of money that you owe will increase. That may drop your credit score a few points.

If you had a late payment on the same Visa card 25 months ago, and have had a clean payment history since, your scores may go up a few points because that delinquency is now over 24 months old.

These are just two of the examples of factors that will cause your credit scores to change so quickly, and for no reasons you can ever figure out.

If you have a good credit score today, that does not mean that your score is chiseled in stone. A good credit score today, simply means that you have good credit score today. Tomorrow, next week, next month or next year could bring big changes!

The next time someone asks you “what’s your credit score?”, instead of blurting out the last score you saw, just say, I don’t know – I’ll have to get back with you.”

That will be the most honest answer you can give.

So back to the original question: What is a good credit score?

In reality, there are no hard and fast standards as to what constitutes good credit or bad. It’s mostly subjective, and it really depends mostly on the source that is using the scores.

According to Experian, most credit scores fall somewhere between 600 and 750. 700 is the rough threshold separating good credit from average or fair credit. Not very scientific sounding, is it?

The mortgage industry gets more specific. According to FNMA, most mortgage loan programs are available with a credit score of 680 or higher, on loans with less than a 25% down payment (or equity, in the case of refinances). Some higher risk programs, such as cash out refinances, or the purchase of 2-4 family homes require scores as high as 700 or even 720. But at the opposite end of the spectrum, you may be able to get a mortgage with a score as low as 620 for lower risk products, such as the purchase of a single family house with a down payment of 25% or more.

Based on mortgage industry standards, 680 is what we might call a “highly workable credit score”. Maybe not “good” – but certainly good enough! A higher score is advisable since different industries have different thresholds.

And it goes without saying that the higher your credit score is, the more likely you are to get the best rate and terms on any loan you are applying for. And higher is always better if you are applying for a job or just about any type of insurance policy. As far as a credit scores that fall under the category of “excellent”, 750 or higher seems to be about standard.

Do you want to know where your score falls in relation to other people’s scores? According to Equifax, the distribution of credit scores across the population looks something like this:

• 20% are above 780
• 20% are in the range of 745 – 780
• 20% are in the range of 690 – 745
• 20% are in the range of 620 – 690
• 20% are below 619

Staying on top of your credit score

If you’re sensing tremendous confusion on the subject of credit scores, the take away should be this: monitor your credit scores early and often! Though you won’t ever know your credit score for lending purposes, you will have a general idea what the ballpark of your score is, and the need to take action if it’s necessary. That could make the difference between getting a loan, a job or an insurance policy – or not.

What are the options to get your credit report – and to get it for free?

Free Resource #1: AnnualCreditReport.com

By law, the three credit repositories – Experian, Equifax and TransUnion – must provide you with a free copy of your credit report once every 365 days. You can do this through AnnualCreditReport.com.

You will not get your credit score through this site, but you will get a copy of your credit report. You should review the report for errors, and take steps to correct them. Doing so will improve your credit score when it comes time to apply for a loan. And it’s always best to fix errors way before you start talking to a lender.

An important point on pulling your credit reports through this site: you are entitled to receive a copy of your report from each of the three repositories each year. You should not order all three at the same time. Instead, order one at a time, maybe four months apart. That will enable you to review your credit report three times per year, rather than just once.

Free Resource #2: Companies that monitor FAKO scores

There are dozens of sources for these, but the two I recommend most are Credit Karma and Credit Sesame. No, these won’t tell you what your actual credit score is, but they will enable you to monitor your credit score level, and that will at least keep you informed if there’s a problem.

• Credit Karma. Free to join and offers free credit reports (they make their money on other services they offer), Credit Karma provides three different credit scores: the TransUnion TransRisk score, your Vantage Score, and an auto insurer score. The site also allows you to update your scores on a daily basis, and it seems to have more options in general.
• Credit Sesame. This site is also free to join and offers free credit reports. Credit Sesame provides access to Experian’s ScorexPLUS credit score, and allows you to obtain updates on a monthly basis.

My recommendation is that you use both services are free, and the combination will allow you to access scores from both TransUnion and Experian.

If you’re even more confused about credit scores than you were before you read this article, then you got the point completely. Credit scores are too complicated to mastered – but that’s exactly why we need to monitor them.

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