What is a Good Credit Rating?

A good credit rating is more important today than it has been for the past several decades. With the implosion of the housing market and many banks teetering on the edge of insolvency, the easy lending policies of the recent past have been largely reined in. Financial institutions are getting back to the enforcement of stricter lending guidelines, and your credit rating is a critical component of their lending decision process.

What is a good credit rating depends to some degree on the scoring model used to calculate the score. The most common one is the FICO score created by the Fair Isaac Corporation. This system uses a proprietary algorithm to calculate a credit rating based on the information contained in your credit report. The amount of outstanding debt and payment history comprise about 65% of the total score. FICO scores range from 300 to 850, and until recently anything over 700 was considered good. More recently, lenders have been looking for scores over 760 because of the rising level of mortgage defaults. Knowing what is a good credit rating will allow you to compare your score so that you can take specific actions to improve it.

Tips on maintaining a good credit rating

Make your loan and bill payments on time and for the full amount if possible. Contrary to what some people believe, opening lots of credit card accounts won’t improve your credit rating. This makes it appear that you are overextending your credit, so it’s best to have no more than two or three. Contact your creditors if you are having difficulty making your payments on time and attempt to work out a repayment plan. Keep your total debt to a minimum and stay well below the credit limit on your cards.

Another goal is to minimize the frequency that your credit report is accessed. Every time a potential lender requests your report, a “hard pull” is recorded that lowers your score by roughly five points. This stays in your file for about six months, so only apply for the amount of credit that you really need.

One myth concerning what is a good credit rating is that closing old accounts will raise your score. Too many accounts can hurt your score, but once they are open there is no reason to close them since your score has already been impacted. One measure used by the credit agencies to assess what is a good credit rating is to compare your total available credit to the amount of credit you are actually using. If you are usually at or near the top of your limit, this will negatively impact your score.

Your credit history is largely a function of the length of time you have held credit or loans. To achieve a good credit rating, you want to build a solid payment history over an extended period, so it’s a good idea to keep old accounts open.

Before applying for a large loan such as a mortgage, try to pay off as many of your other debts as possible. This will result in a lower credit utilization ratio since your used credit will decrease while your available credit will increase. This is viewed favorably by lenders and will usually entitle you to a lower interest rate. Your heightened awareness of what is a good credit rating and how to achieve it may save you large sums of money over the long run.