What is a Good Credit Score?
Perhaps the most common question I hear when it comes to credit is “what is a good credit score?”
Unfortunately, it’s a bit of a loaded question, because the numerical value tied to your credit history and profile is a bit shortsighted, if not semi-useless. Yeah, I said it. Credit scores are somewhat useless, at least numerically speaking.
Sure there are credit scoring tiers, or thresholds, which certain banks and lenders require for approval of a loan or a credit card, but they’re flawed. On the surface, 720 is considered a good credit score. It’s relatively high in the credit score range, but what’s behind that score?
Here’s where things get more complicated; consumers with very little credit history may have excellent credit scores, because they tend to have squeaky clean records, no lates, no derogatory accounts, and no outstanding balances.
Unfortunately, these same consumers may not have much in the way of positive credit history either, so their seemingly good credit scores don’t carry much weight. Sure, they may have never been late, and they may not have any credit card debt, but they also haven’t proven that they can carry heavy debt loads and subsequently pay those debts off.
Conversely, a consumer with what may be known as an average credit score, say 680, could have a much stronger credit history, with loads of tradelines and years of solid payment history. At the same time, they could have something holding them back, like too much outstanding debt or too many recent inquiries.
This is where credit scoring gets put to the test, because the three-digit number alone may not tell the whole story. And creditors should know this, and dig deeper before judging someone on a simple numerical value.
Consider this example:
Say two prospective borrowers come to you for a loan. Both need $1,000, but their credit profiles (and credit scores) are quite different.
Borrower A: 30 years of solid credit history, $10,000 in outstanding debt, 680 credit score
Borrower B: 1 year of perfect credit history, $250 in outstanding debt, 730 credit score
In the above example, assuming you were the bank, who would you want to lend your money to? The borrower with 30 years or pretty good credit history and some existing debt, or the borrower with a single year of credit history and very little outstanding debt?
Personally, I think I’d go with Borrower A, who despite having a lower credit score, which may not be considered as good, has a stronger propensity to pay me back, proven by their years of credit usage.
This is why credit scoring thresholds don’t work, even though they are common in the world of mortgage lending. Awarding borrowers for being over pre-set credit score thresholds is a fatal flaw, and one that has led to serious problems, as those who had no real history of supporting large debt loads were granted loans based a three-digit score.
So before you think you’ve got a so-called good credit score, look at what’s behind that number before assuming you’re good to go.