Good Credit

What is 'Good Credit'

Good credit is a classification for an individual's credit history, indicating that the borrower has a relatively high credit score and is a safe credit risk.

BREAKING DOWN 'Good Credit'

Good credit is determined by a borrower’s credit score. Credit scores are provided through credit reporting agencies. Lenders check credit scores for the purpose of providing credit underwriting decisions and background check details.

Credit Quality Classifications

Credit rating agencies assign a score to an individual based on their credit history which is tracked by agencies in a credit report. Credit scoring can vary according to the methodologies used in calculating the credit score. The most commonly used credit score is the FICO Score.

A borrower’s credit score can range from 300 to 850. Lenders will identify credit score classifications by various categories. Typically credit scoring classifications can be broken into five tiers. These tiers include exceptional, very good, good, fair and poor. Borrowers with a good credit score could be in any one of the top three categories. According to a breakdown from Experian, exceptional credit borrowers will have a score ranging from 800 and higher, very good borrowers will have a score ranging from 740 to 799 and a good borrower will have a score ranging from 670 to 739. Therefore, borrowers with a credit score of approximately 670 or higher are considered good credit score borrowers and have the best chance of receiving credit approval from a lender.

The last two tiers include fair and poor. These two categories refer to subprime borrowers. Fair borrowers will have a credit score of 580 to 669 and poor encompasses borrowers with a credit score of 579 or less.

Borrower Considerations

There are a number of factors that influence a borrower’s credit score. If a borrower is in the lower tiers and seeks to improve their credit score so that they fall in the good credit classification there are a few important things they can consider. Credit scores are substantially based on a borrower’s payment history. Any delinquent payments will affect a borrower’s credit score and remain on a credit report for seven years. Thus, making payments on time with no further delinquencies can help a borrower to see monthly credit score improvements.

One factor that can help to quickly improve a borrower’s credit score is the amount owed overall. Total utilization accounts for approximately 30% of a borrower’s credit score. Therefore, if a borrower can significantly pay down outstanding debt balances then that can rapidly improve their credit score month over month.

Other factors involved in the credit scoring methodology include length of credit history, types of credit used, new credit and credit inquiries. Borrowers seeking to improve their credit score should be cautious about the new credit they take on and the number of credit accounts they apply for. A high number of hard inquiries in a short amount of time can negatively affect a borrower’s credit score and increase their perceived risk of default to lenders.

Lender Considerations

A borrower’s credit score is a significant factor influencing the type of credit that they will be eligible to be approved for. Traditional lenders generally focus on the good credit quality borrowers. This means they will typically only consider borrowers with good credit, reporting a credit score of 670 or higher. These good credit quality borrowers are more likely to receive loan approvals overall. They are also more likely to receive more favorable loan terms than lower tier borrowers which often have to seek alternative lenders or secured credit cards.