Credit scores range from 350 to 850 and are a reflection of debt-paying activity. A credit score is used to evaluate the risk of lending an individual money. An individual’s score determines what loans they qualify for, at what interest rate, and with what credit limits.
The best rates go to people with credit scores around 760. That said, a credit score of 700 is also considered good and a borrower with a score in the mid-700s (depending on the lender) can also qualify for some of the best rates. A high FICO score is typically mid 700s or above and it’s best to have a credit score above 720. Scores below that (and especially below 700) are considered average. “Average” isn’t necessarily a bad thing, but an average score doesn’t get the same low rates as a high score.
The Cut Off Point
In the 1990s, in the mortgage market a FICO score of 620 was the bottom cut off for loans that could be sold to Fannie Mae or Freddie Mac. It’s likely that a borrower with a score of 620 or below will qualify for a standardized rate. Most lenders consider a 620 credit score as the line between good and bad credit. Anything above 620 is considered good or average. In 2002 around 20% of the US population had a credit score of 620 or lower.
A High Risk Borrower
Credit scores below 600 indicate high risk for lenders. This makes it more difficult for a borrower to get credit or avoid higher loan rates. So, a score this low can result in credit denial or higher interest rates. Statistics show that the risk of default is very high with borrowers with a 600 or below, which is what lenders try to avoid. When qualifying someone for a loan, lenders want to avoid risk as much as possible. Credit scores near or below 550 are considered bad.