Credit Scores Explained: What is a Good Score? | City National Bank (2024)

Credit scores play a pivotal role in our financial lives. A healthy credit score opens up many opportunities to you, such as buying a house or financing a car, and makes it more likely that you will get favorable terms from lenders.

Navigating the world of credit scores can be overwhelming. The intricacies and nuances might seem daunting, leaving you unsure of where to begin.

So, as you set your sights on your financial goals, here are important things that you need to know about credit scores and what a good credit score could mean for you.

What Is a Credit Score?

A credit score is a number that represents your creditworthiness. It serves as an indicator for potential lenders, providing them with insights into how likely you are to repay borrowed funds.

Lenders often rely on credit scores to make informed decisions when reviewing applications for mortgages, student loans, personal loans, credit cards and other forms of credit. Additionally, your credit scores can influence the interest rates and terms offered to you if you are approved by a lender.

A higher credit score could mean you will qualify for lower interest rates on loans. That's because a high score helps to provide lenders the confidence that borrowers will pay off their loans on time. Those more desirable borrowers often receive lower interest rates from lenders.

How to Get My Credit Score?

First things first. If you're not sure where to find your credit score, here are four ways you can get it:

1. Check with your credit card provider:Many credit card issuers provide their current cardholders and borrowers with a complimentary credit score. Some banks and financial institutions, like City National Bank, even allow you to conveniently access your score through their mobile apps.
2. Check with major credit bureaus:Credit bureaus are required by law to provide free annual reports throughthis site. It's important to review your credit report regularly to find any errors or discrepancies that could affect your credit score.
3. Consult a nonprofit credit counselor:If you have questions about your credit, budgeting, home buying, bankruptcy, or managing credit card debt, consider seeking assistance from a nonprofit credit counselor. These credit counseling agencies can help you check your credit score and explain how to build credit and improve your score. Just be sure that the credit counselor you work with is truly a well-regarded nonprofit. Unfortunately, some outfits claiming to be "credit counseling services" are scams designed to part you from your money and get you further into debt.
4. Use free credit score services:Several websites offer free credit scores as an incentive for creating an account. However, keep in mind that the type of score and accompanying credit report they deliver may vary among different websites. While these services are often free, some sites may try to get you to sign up for additional paid subscriptions with enhanced features in order to get your score. That's not necessary, so proceed with caution.

Whether you choose to check with the major credit bureaus, use a free service, or consult a credit counselor, knowing your credit score empowers you to make better financial decisions and work towards a more secure financial future.

What Is the Highest Credit Score?

An 850 credit score is the highest achievable score in the most commonly used credit scoring models. While achieving a perfect credit score is admirable, it is exceedingly rare.

Reaching an 850 credit score shouldn't be the sole focus of your credit management strategy. Instead, concentrate on building a strong credit profile by practicing responsible habits. Consistent, positive credit behavior over time may naturally lead to a higher credit score, even if you don't reach a perfect 850.

Credit Score Ranges

Understanding credit score ranges is essential for evaluating your creditworthiness. Note that there are multiple types of credit scores. The most popularly used credit scoring model isFICO, followed byVantageScore.

Let's break down the score ranges for both models:

FICO Credit Score Range (300-850)

These ratings are set by FICO and are not determined by City National or any other financial organization.

The higher your FICO score, the better your creditworthiness. Lenders usually categorize borrowers based on these ranges to assess risk associated with extending credit.

VantageScore Credit Score Range (300-850)

These ratings are set by VantageScore and are not determined by City National or any other financial organization.

VantageScore also operates on a scale from 300 to 850, but the categories are slightly different from FICO. Both scoring models, however, aim to measure creditworthiness, with higher scores indicating lower credit risk.

How to Interpret Your Credit Score?

Interpreting your credit score is important in order to grasp your financial standing and potential borrowing opportunities.

When you get your credit score, consider the following factors:

1. Credit score range:First, identify where your credit score falls within the specific scoring model's range. For example, if you have a FICO score of 750, you fall into the "Very Good" range, while a VantageScore of 700 would place you in the "Good" category.
2. Credit rating:Pay attention to the label associated with your credit score range. This label, such as "Fair," "Good" or "Excellent," gives you a quick understanding of how lenders perceive your creditworthiness.
3. Credit risk assessment:Recognize that higher credit scores correspond to lower credit risk. Lenders are more inclined to approve loans and credit applications from individuals with higher credit scores as they are considered more reliable borrowers.
4. Credit opportunities:Based on your credit score and rating, you can assess the types of credit products and loan offers for which you are likely to qualify. Those with excellent credit may be eligible for premium credit cards with rewards and the lowest interest rates on loans.
5. Credit improvement:If you have a poor credit score, don't despair. Use your credit report to identify areas for improvement. Focus on making timely payments, reducing outstanding debts and avoiding opening multiple new credit accounts in a short period.

Credit scores are dynamic and change over time based on your credit behavior. Regularly monitoring your credit and maintainingresponsible financial habitscan help you build credit and improve your credit score for better financial opportunities in the future.

What is a Good Credit Score?

Defining what exactly constitutes a good credit score can be complex due to the variety of credit scoring models and lender preferences.

Generally speaking, a credit score of 670 or above is considered desirable. With a credit score in this range, you are more likely to be viewed as a reliable borrower by lenders, making it easier to qualify for personal loans, credit cards and other forms of credit.

Additionally, different lenders have their own criteria for rating credit scores. This means that what is considered a good credit score versus a bad credit score may vary slightly depending on the specific scoring model or the institution you are working with.

What Credit Score is Needed to Qualify for a Mortgage?

If you're consideringbuying a houseandapplying for a mortgage, a good credit score may increase your chances of approval and of securing you a lowerrate. The minimum credit score needed for purchasing a home can vary depending on the type of mortgage loan and thespecific lenderyou choose.

Here are the minimum credit score requirements needed to qualify for different types of mortgage loans:

1. Conventional mortgage:For a conventional mortgage, most lenders require a minimum credit score of 620. However, aiming for a credit score in the "Good" range can lead to more favorable terms and potentially lower interest rates.
2. FHA home loans:The Federal Housing Administration (FHA) provides home loans to borrowers with lower credit scores. You may beeligible for an FHA loanwith a credit score of at least 500 if you can make a 10% down payment or 580 if you can make a 3.5% down payment.
3. USDA loans:United States Department of Agriculture (USDA) loans don't have a set credit score requirement. However, most lenders typically prefer a credit score of at least 580 to qualify for a USDA loan.
4. VA loans:If you're a veteran or an active-duty service member, you may qualify for a VA loan with no set minimum credit score requirement. However, the VA mandates that a lender must thoroughly review the complete loan profile of a candidate.
5. Special program:Some banks offerspecial programsdesigned to help specific types of borrowers, including those with lower credit scores, secure a mortgage. Requirements for these loans can vary greatly from institution to institution.

While it's possible to get a mortgage with a lower credit score, it's generally recommended that you improve your credit score before applying for one. By doing so, you may qualify for better terms,

potentially save money on interest payments, and make your homebuying journey smoother and more affordable.

If your credit score from any agency is not in the "Good" range, consider taking steps to enhance your credit profile, such as paying bills on time, reducing outstanding debts and addressing any errors in your credit report. Over time, these efforts can lead to a better credit score and improve your chances of securing a mortgage with favorable terms.

What Credit Score is Needed to Purchase a Car?

When buying a car, having a "Good" credit score (from whichever reporting your lender uses) can make a difference in the auto loan terms you qualify for. While there isn't a set minimum credit score required to buy a car, aiming for a credit score in the "Good" range from whichever credit rating company your lender uses is generally recommended.

If your credit score falls below 660, which might be considered "Fair" or "Poor" credit, you may still be able to get an auto loan. However, individuals with lower credit scores are often charged higher interest rates as lenders try to mitigate their perceived risk. This may result in higher monthly payments and overall borrowing costs.

Building your credit score into the "Good" range can make the process of buying a car easier. Not only will it open up more loan options and lower interest rates, but it may also save you money in the long run. Remember, responsible credit management and a higher credit score can empower you to negotiate better deals.

What is the Average Credit Score

Theaverage FICO scorein the United States is 714. This score is generally considered favorable by lenders. The average credit score serves as a valuable benchmark for understanding the credit landscape and gauging where your own credit score stands in comparison.

Theaverage VantageScoreis 698, another score that is generally considered favorably by lenders.

How Is a Credit Score Calculated?

Your credit score is calculated based on key factors that provide insights into your creditworthiness and credit management habits.

The most common credit-scoring models often take into account the following factors:

1. Payment history:Your payment history tells lenders whether you have a history of making timely payments on your credit accounts. Consistently paying your bills on time shows responsible credit behavior and positively impacts your credit score.
2. Credit utilization:Credit utilization is the percentage of available credit that you are currently using. Using available credit then paying it off shows that you manage credit responsibly and it can positively influence your score.
3. Age/length of credit history:Generally, a longer credit history is viewed more favorably, as it provides a more comprehensive track record of your credit management habits. Closing old credit accounts may shorten your credit history and potentially lower your score.
4. Mix of credit:Having a mix of credit, such as credit cards, personal loans and retail accounts, can positively impact your credit score. It indicates that you can manage various types of credit responsibly and diversify your credit portfolio.
5. Most recent inquiries:Multiple "hard inquiries" (explained below) within a short period can slightly lower your credit score. Therefore, it's best to avoid opening several new credit accounts simultaneously, as that may be perceived as a sign of increased credit risk.

Different credit scoring models may weigh these factors differently, leading to some variations in credit scores across different models. Additionally, each individual's credit profile is unique, so the impact of these factors on your credit score may vary.

Does Checking a Credit Score Lower It?

Checking your credit score does not always lower it. In fact, it is essential to regularly monitor your credit reports and scores to ensure the accuracy of your personal and account information and to identify any signs of potential identity theft.

However, you'll need to understand the difference between a "hard" and "soft" credit check to prevent your score from being impacted.

Soft vs. Hard Credit Checks

When you request a copy of your credit report or check your credit scores, it is considered a "soft" inquiry. These inquiries do not affect your credit score as they are not visible to potential lenders who may review your credit reports.

Soft credit inquiriesinclude:

• Checking your own credit.
• Promotional credit card offers sent to you.
• Existing account reviews by companies with whom you already have accounts.

Soft inquiries typically remain on your credit report for 12 to 24 months.

On the other hand, "hard" inquiries occur when you apply for a loan or credit card, and a third party obtains your credit report. Hard inquiries may have a minor impact on your credit score, usually resulting in a temporary decrease of a few points.

Managing Your Hard Credit Checks

If you are shopping for a big purchase, such as a house or a mortgage, and are comparing rates from different lenders, multiple hard inquiries within a short period are often treated as one inquiry. This allows you to shop around for the best loan terms without significant negative effects on your credit score.

The timeframe for this multiple-inquiry exception typically ranges from 14 to 45 days. However, this exception may not apply to credit card inquiries.

How to Boost Your Credit Score

Boosting your credit score can help you obtain better loan terms. But for some, boosting a credit score is easier said than done.

Here are some effective strategies to help improve your credit score:

1. Make on-time payments:Every month, ensure you make at least the minimum payment on your accounts. On-time payments show lenders that you are responsible and reliable.
2. Keep credit utilization low:Aim to pay off the credit that you use. Many financial experts suggest keeping your balances below 30% of your available credit.
3. Open new accounts responsibly:Open new credit accounts only when necessary. Frequent credit applications can result in multiple hard inquiries, potentially lowering your credit score.
4. Check your credit reports regularly:It's essential to review your credit reports for accuracy and errors from all three major credit bureaus. Dispute any discrepancies you find to ensure that your credit reports are up-to-date and correct.
5. Diversify credit types:Having diversified credit, such as credit cards, student loans and mortgages, may positively impact your credit score. This demonstrates your ability to handle various forms of credit responsibly.
6. Work with creditors:If you are struggling to make payments, work with your creditors before any late payments or other delinquencies show up on your credit report. Late payments and other evidence of default (such as a negotiated repayment plan) may have significant negative effects on your credit report.
7. Become an authorized user:Ask a friend or family member with a good credit history if you can become an authorized user on one of their accounts. Their positive payment history can potentially benefit your credit score.
8. Pay down debt:Focus on reducing outstanding debt, particularly high-interest credit card balances. Lowering your debt can improve credit utilization and positively affect your credit score.
9. Seek professional guidance:If you're facing credit challenges, reach out to a nonprofit credit counseling agency. Their expertise can help you create a personalized plan to improve your credit.

Boosting your credit score takes time and consistent effort. Be patient, practice responsible credit habits and monitor your progress regularly.

Why Did My Credit Score Drop for No Reason?

Experiencing a sudden drop in your credit score might seem confusing, especially if you cannot pinpoint a specific cause. However, credit scores typically do not drop without a reason.

When information on your credit report is updated, it can lead to changes in your credit score. The extent of the score fluctuation depends on the nature of the updated information.

Another factor to consider is the existence of different credit scoring companies, each employing their own scoring models. As a result, you may notice variations in your scores from one model to another. While differences are common, significant drops in your credit score are usually triggered by specific events or activities.

Here are some common reasons for a credit score drop:

1. High credit card balances:Running up high credit card balances can have an adverse effect on your credit utilization ratio. Credit utilization is determined by comparing your credit card balances to your credit limits. A high utilization ratio can cause your credit score to drop.
2. Reported late payment:Late or missed payments can negatively impact your credit score. Payment history is a major factor determining credit scoring, and any recent late payment can be detrimental.
3. Credit card account closure:Closing a credit card account, especially one with a long credit history or a substantial credit limit, can potentially reduce your available credit and impact your credit score.
4. Paying off a loan:Surprisingly, paying off a loan can sometimes lead to a temporary dip in your credit score, especially if it was your only installment account.
5. Recent credit applications:Applying for new credit can result in hard inquiries on your credit report. Multiple hard inquiries within a short period can lower your credit score.
6. Identity theft:If you become a victim of identity theft, fraudulent activities on your credit accounts can cause a sudden decrease in your credit score.

If you notice a drop in your credit score, carefully review your credit report for any inaccuracies orsigns of identity theft. Regularly monitoring your credit can help you maintain a healthy credit profile and take appropriate actions if any issues arise.

Monitoring Credit Reports

Regularly monitoring your credit reports is important to safeguarding your financial security. By staying vigilant, you can detect potential identity fraud early and avoid surprises when applying for credit.

Many financial institutions offer some form of credit monitoring to clients.

For example, theCity National Bank appoffers convenient features that allow users to check their credit score easily, providing valuable insights into their credit health and helping them make informed financial decisions.

Protecting Your Credit Score

Safeguarding your credit score is essential for your financial security. If you notice any suspicious activity or suspect identity theft, take immediate action.

First, contact the credit bureaus to freeze new account openings. This prevents unauthorized individuals from accessing credit in your name.

Report any cases of identity theft to the appropriate authorities andfile a complaintwith the Federal Trade Commission (FTC). For more tips and advice, check ourfraud prevention and reportingpage. Acting promptly can mitigate the impact of identity theft on your credit and overall financial well-being.

If you are the victim of identity theft that is reflected in your credit report, you ultimately are not responsible for the fraudulent accounts, and the credit bureaus must remove fraudulent entries.

Being proactive and vigilant will help protect your credit score and ensure a solid foundation for your financial future.