Grading Your Credit Score

A great credit score could open up financial opportunities, like being able to afford a new house or car; things that aren't as widely available to those with not-so-great credit scores. It’s a fact of modern life. Of course, if you have a particularly poor credit score, it might feel less like a fact and more like a cruel joke.

Attorney and best-selling author of The Plastic Effect, Stephen Lesavich says, "Like it or not, decades of research have shown that a person’s credit score can be used directly to predict risk in the underwriting of both credit and insurance.”

Your credit score determines a lot. So it will help to know…

How do credit scores work?

Your credit scores don’t just magically appear out of nowhere. They’re based on the information in your credit reports, which are compiled by the three major credit bureaus—Experian, TransUnion, and Equifax—and contain data on how much money you’ve borrowed, whether you make your payments on-time, etc.

Think of a credit score as a letter grade on your credit report: Just like getting an A is an easy way to tell if you did well on your math test, having a credit score of 780 is a fast way for lenders to see that you have a history of using credit responsibly.

While each of the credit bureaus can produce their own version of the credit score, the most common kind of score is the FICO score. According to Lesavich, “About 90% of all lenders use FICO credit scores to determine creditworthiness.”

FICO scores are based on a scale of 300-850 (with 300 being the worst and 850 being the best). Since a credit score is like a grade, we thought it might be nice to translate some of those score ranges into letter grades. So without further ado…

Grade A

If you have a credit score of 720 or above, congrats! You have great credit!

A credit score in this range is what everyone should strive for. It means that you make your payments on time and don’t max out your credit card(s). It might even mean that you don’t carry any balance on your card(s) from month to month and that your debt load is manageable compared to your income.

While having a credit score of 720 might not entitle you to the very best interest rates—those are usually reserved for people with even higher scores—it still means that you may save thousands of dollars in interest. Plus, a score in this range might qualify you for additional credit card rewards and perks.

Grade B

If you have a credit score between 680 and 719 you have good credit.

There is nothing wrong with having a score in this range. Sure, you should definitely strive to improve your credit score—higher is always better—but by no means you should panic. It’s still above average.

A score in this range probably means that your credit history isn’t quite as long, or that there were one or two bills you forgot to pay. It could also mean that your credit card balances are high or that you’re still paying towards your student loans.

People with scores in this range might be seen as a riskier bet, but they’re still likely to be approved for a personal loan. No matter what kind of loan they’re taking out, their rates will be higher than the rates of people with great credit.

Good credit isn’t bad, but how good is it?

Here we'll discuss the impact a credit score in this tier will have on the loans available to you and the interest rates you can expect to be charged. We will also show you how to begin improving your score.

What Kind of Loans Can You Get with Good Credit?

If you have a score between 680 and 719, then you have a generally good record of using credit, but there is still something holding you back from reaching your full credit potential. It could be that your credit card balances are a bit high (above 30% of your total credit limit), or that you forgot to pay a bill or two sometime in the past couple of years.

Either way, you will likely qualify for most kinds of financial products. According to Roslyn Lash AFC®, Founder of Youth Smart Financial Education Services, “A person with a good credit score can get better interest rates which translates into a lower payment. There are other benefits too, such as lower insurance premiums, less expensive car payments, and even a better chance of employment."

The same goes for buying a house. With a credit score in this range, you will likely qualify for a mortgage loan, but your interest rate may dictate that you purchase a less expensive home. Instead of the 4-bed, 3-bath, maybe the 3-bed, 2-bath is a better financial fit. Make sure to read your contract thoroughly because in this range you are slightly more vulnerable to predatory housing lenders.

One area where you may run into issues qualifying for a loan is with an unsecured loan from a traditional lending institution like a bank. These loans do not involve any collateral, which is a property that the lender can claim if you don’t pay them back. These loans are approved based on whether or not the lender thinks you can repay. Your credit score is absolutely crucial for these loans, and you may be turned down, especially if you’re asking for a larger loan to consolidate other debt.

What Kind of Interest Rates Can You Get with Good Credit?

Remember, your FICO credit score is basically a letter grade for the information in your credit report. It factors every bill you paid, every balance you carried over month-to-month, and every loan you took out and produces a three-digit number that tells lenders, “This is how person X handles borrowing money.”

Using the MyFico Loan Savings Calculator, you can see that a person with a 690 credit score who applies for a 60-month, $30,000 auto loan would pay an interest rate of 4.857%. Compare that to the 3.512 rate that a borrower with a 790 score would pay. Over the life of the loan, the borrower with the 690 score would pay an additional $1,096 compared to the borrower with the 760 score.

As for credit cards, the Lead Insurance Editor for the White Label Personal Finance Project, J.R. Duren, says “Most credit cards have three tiers of APRs that range from, on average, 16% to 25%. Middle-of-the-road credit scores may be able to snag the occasional low rate, but expect to get the middle rate, which hovers around 19-21%.”

Grade C

If you have a credit score between 630 and 679, you have fair credit.

A score in this range means that you probably have too much debt and/or more than a few late payments. You might even have a collection notice or two against you. This means you might not qualify for some unsecured personal loans—especially ones from a traditional lender—and you will have to pay a substantially higher rate for a mortgage, auto loan, or credit card.

While people with fair credit can still qualify for most kinds of loans—especially secured loans—this is the point at which the cost of borrowing really starts to add up. Trying to pay down your debt, take care of your overdue accounts, and get better about making payments on time are all good places to start if you’re looking to improve your credit score.

If you have a credit score in this range, it’s probably a good idea to get a copy of your credit report. According to author and credit expert, Julie McDonough, “One out of three consumers have errors on their credit report that can be affecting their credit scores. Most people are more interested in knowing their credit score and are not reviewing the source of that score, their credit report.”

McDonough says that you should obtain a free copy of your credit report—available per federal law at AnnualCreditReport.com–and dispute any and all errors on the report.

According to McDonough, items to look for in your credit report include:

1. Variations in data between the three major bureaus
2. Accurate and timely reporting of payments—especially for accounts that have been paid in full
3. The accuracy of your full name and social security number
4. The correctness of current balances and terms

What Kind of Loans Can You Get with Fair Credit?

If you have a FICO credit score between 630 and 679, lenders may see you as less-than-reliable. You will feel the negative effects of your score most severely when you apply for unsecured personal loans, especially ones from traditional lending institutions, like a bank.

Since unsecured loans don’t require collateral, decisions to lend money or deny loan applications are made based entirely on the borrower’s ability to repay the loan. Or rather, they are made on the lender’s belief in the borrower’s ability to repay. As such, a borrower’s credit score is crucial for getting approved for an unsecured loan from a traditional lender.

With a score between 630 and 679, you will most likely not qualify for traditional unsecured loans. However, you still might qualify for a personal loan from a non-traditional, internet-based lender. These lenders usually offer higher rates than traditional lenders, but those higher rates allow them to lend to borrowers with lower scores.

You will still probably qualify for secured loans, like auto loans and mortgages, though you will likely be charged higher interest rates. If you’re not careful, those high rates could lead you to default on the loan and have your car or house repossessed.

What Kind of Interest Rates Can You Get with Fair Credit?

If you have a score between 630 and 679, it sends a signal to lenders: this borrower is not great at paying back the money they owe. While some won’t lend to you at all, the lenders who do will charge more interest.

According to the MyFico Loan Savings Calculator, a person with a score of 655 who takes out a $300,000, 30-year, fixed-rate mortgage would pay over $66,000 more than a person with a score of 760. That same calculator estimates that a person with a 655 credit score who takes out a $30,000, 60-month auto loan would be charged an annual percentage rate (APR) of 9.661%, almost three times the 3.517% rate that someone with a 760 score would be charged. That adds up to an additional $5,186 paid in interest.

Higher interest rates are not the only way that having fair credit will increase your costs. Roslyn Lash, AFC®, Founder of Youth Smart Financial Education Services, says “If you’re buying a car, don’t expect to receive ‘a 0 percent interest rate, rebates, or incentive.’ These perks are reserved for persons with good credit.”

However, Lash is clear that people with scores in this range still have options, saying “If you put more money down, you’ll be able to buy the car,” but “since your interest rate will be higher, your payment will also be higher.”

Grade D

If you have a credit score between 550 and 629, you have subprime credit.

Folks with credit scores in this range may not qualify for a loan from traditional lenders like banks. They might have a narrow range of lenders they can borrow from, and might even find their ability to get hired or get an apartment affected by their credit woes.

If you have a score in this range, it’s likely that you have a history of late payments, have been sent to collections on one or more accounts, and have a debt load that is too large for how much money you make. Whatever the reason, it is recommended that you meet with a certified credit counselor to go over your finances; they can help with budgeting, establishing better money habits, and managing your debt through a debt management plan.

People with subprime credit scores are seen as risky by lenders. Their credit score indicates that they haven’t been great about paying back lenders. While the higher interest rates lenders charge these borrowers are understandable, the predatory lending practices that some of them use are not. A credit score in this range means you could be a target for predatory lenders offering products like payday and title loans.

Grade F

If you have a credit score below 550, you have poor credit.

Take a deep breath. It’s going to be okay. Having a credit score in this range is not great, but all credit scores are fixable. Even yours.

A score in this range is most likely the result of defaulting on past loans or declaring bankruptcy. You probably have several collection notices on your report, or you might have a massive amount of debt – especially credit card debt. If you haven’t scheduled a meeting with a certified credit counselor – it is something to consider.

Most of the loans you will qualify for will come with extremely high interest rates – which is understandable, given what your credit score says about your borrowing habits. And you likely won’t be able to get a credit card unless it’s secured.

Be careful to avoid predatory lenders. With short terms, lump-sum repayments, and a lending strategy focused on high-cost loan rollover, you should stay as far away from these lenders as possible. They won’t make your situation any better. They’ll only make it worse.

While the letter grades you received in school were often final, your credit score is not.

What Can I Do to Improve My Score?

First thing first, if you haven’t requested a copy of your credit report, do that. Under federal law, you are entitled to one free copy of your credit report per year from each of the three major credit bureaus: Experian, TransUnion, and Equifax.

You can request a free copy of your report by going to AnnualCreditReport.com. Once you have your report, you should review it with a fine-tooth comb looking for two things: errors and clues. Information can differ between the credit bureaus, and mistakes too, so it's a good idea to get all three reports to compare them.

Errors refer to incorrect information on your report. Maybe there is a credit card you paid off that still shows a balance, or maybe you had a bill sent to collections that you paid in full but the collections account still shows as open. Whatever the error, you should report it to the bureau immediately. For more information, visit the Federal Trade Commission website.

While paying down those balances will help your credit score substantially, credit expert Chella Diaz is clear on the fact that you should not stop using your credit cards altogether. She suggests that you keep using your cards to pay for things like gas and groceries to keep them active.

Stephen Lesavich, PhD, JD, is an attorney, credit card expert, award-winning and best-selling author of "The Plastic Effect How Urban Legends Influence the Use and Misuse of Credit Cards."

Julie McDonough, has more than 28 years’ experience as a real estate broker, loan broker, and credit consultant. Julie is also the author of "How to Make Your Credit Score Soar."

Roslyn Lash, (]@RosLash) is an Accredited Financial Counselor and the founder of Youth Smart Financial Education Services. She specializes in youth financial education, and adult coaching and works virtually with adults helping them navigate through their personal finances i.e. budgeting, debt, and credit repair. Her advice has been featured in national publications such as USA Today, TIME, Huffington Post, NASDAQ, Los Angeles Times, and a host of other media outlets.

J.R. Duren, is the Lead Insurance Editor for the White Label Personal Finance Project.

Chella Diaz, is a mom, author, speaker and consultant. She empowers parents with young children to set up their kids to be their own bank. She facilitates workshops for college students. One of Chella’s greatest strengths is showing people the ways they can save money so they always have money for the things that are most important. You are the boss and the money is your employee. How are you going to manage it?