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It’s common knowledge that a person’s credit score can have a significant impact on their ability to get the best deals on loans and credit cards. And those opportunities can potentially save borrowers many thousands of dollars over a lifetime. But exactly what the credit rating scale involves is a mystery to many people. That’s a problem for potential applicants who’d like to build their score before shopping around for a loan.

Read on to gain insights into how credit scores are calculated, what the different credit ranges mean, and what you can do to qualify for the best interest rates.

The Three Major Credit Bureaus

Credit bureaus are independent agencies that collect and maintain consumer credit information and then resell it to businesses in the form of a credit report. The Fair Credit Reporting Act allows the government to oversee and regulate the industry.

There are three major credit bureaus that most lenders pull data from:

•   Equifax®

•   Experian®

•   TransUnion®

Commonly used credit scoring systems are FICO® and VantageScore, each of which ranges from 300 to 850.

What Actually Factors into Your Credit Score?

Here’s a closer look at the popular FICO Score system, which uses a scoring model that sources data from credit bureaus to calculate your score. Elements used in the FICO scoring model (as of this writing, the latest version is FICO Score 10) include:

•   Payment history: 35%

•   Credit utilization: 30%

•   Length of credit history: 15%

•   Credit mix: 10%

•   New credit: 10%

Wondering what those terms mean? Here’s a closer look:

Payment History

Payment history looks at whether you pay your bills in a timely manner. Do you have a history of paying bills a couple weeks late, or are you the type who always pays your cable bill even before it is due? That’s the kind of thing that will come into play here.

Credit Utilization

“Amount owed” is pretty self-explanatory — it’s how much total debt you’re currently carrying. Your “credit utilization ratio” may not be quite so clear. That’s the amount of credit you actually use compared to the amount of credit available to you. Lenders generally like to see a credit utilization ratio of 30% or lower. Some even recommend no more than 10%.

Here’s an example: Say you owe $500 on each of two credit cards, and one has a credit limit of $1,000 and the other has a limit of $3,000. The amount you owe is $1,000 out of a credit limit of $4,000. So you are using 25% of your available credit. Your credit utilization is therefore 25%. 

Length of Credit History

This factor looks at the age of your oldest and newest accounts and the average age of all your accounts. To lenders, longer is better.

Credit Mix

Credit mix considers the variety of your debt — is it primarily credit card debt? Do you carry student loan debt or have a mortgage? A desirable mix is a combination of revolving debt (lines of credit, credit cards) and installment debt (loans with fixed repayment terms like student loans and car loans).

New Credit

New credit looks at what accounts have recently been opened in your name, or if you’ve taken out any new debts. Trying to access a considerable amount of credit in a short period of time can have a negative impact on your credit score.

Recommended: Credit Card Utilization: Everything You Need To Know

How’s Your Credit?

Where your credit score falls on the scoring table determines how “good” your credit is. Here’s a breakdown of the credit rating scale according to FICO standards.

•   Excellent or Exceptional: 800-850

•   Very Good: 740-799

•   Good: 670-739

•   Fair: 580-669

•     Poor: 300-579

Ready for a plot twist? Your credit score may not be consistent. Some reasons why:

•   There are different scoring systems, and variations in how various lenders and creditors report information. 

•   Also, FICO can tweak their algorithm depending on the type of loan you’re applying for. If you’re looking to get an auto loan, your industry-specific FICO Score may emphasize your payment history with auto loans and deemphasize your credit card history. In effect, each consumer has multiple credit scores.

•   You may also hear the phrase “educational credit score.” This can refer to the proprietary scoring models used by TransUnion and Equifax, not necessarily to be used by lenders, which can help educate consumers about their credit scores. Since they may or may not reflect the credit score that potential lenders use, it can be wise to make sure you know what kind of credit score you are viewing.

You are probably curious how your credit score stacks up to the national average. The average three-digit number in the U.S. is currently 714. 

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Trying to Build Your Credit Score With Credit Card Debt

You’ll notice that a lot of information around improving your credit scores focuses on debt reduction. After all, 30% of your FICO Score is based upon outstanding debt. By paying that down on time, you may be able to build your credit score. For this reason, one potential action item for those trying to have a positive impact on their credit history is to work on paying down credit card debt.

Credit card debt may be the highest-interest debt you’re carrying. Compare these numbers:

•   The average credit card interest rate on interest-accruing accounts with balances was 22.76% mid-2024, according to the Federal Reserve. 

•   A rate of 6.53% was established for federal undergraduate student loans for the 2024-2025 school year.

•   The average mortgage rate was 6.37% in September 2024 for fixed-rate, 30-year conforming loans. 

That means if you have credit card debt, it could be your fastest growing debt. By getting rid of it, you may be able to significantly reduce your outstanding debt. Here are a few techniques:

•   One way to get out of credit card debt is to consolidate it into a lower-interest option. With a balance transfer credit card, you can move your high-interest debt to a 0% interest card. The catch is that the 0% interest is temporary, and after a given amount of time (typically 12 to 21 months), the interest rate shoots up.

•   Another option is to take out a personal loan, which can consolidate multiple high-interest credit card debts into one monthly payment, often at a lower interest rate. For example, in September 2024, the average personal loan rate was 12.38% vs. almost 23% for credit cards, as noted above. Personal loans are typically unsecured loans with a fixed interest rate and terms of two to seven years. This could help you pay off your debt more quickly, which might help build your score. 

•   One other tip for potentially building your credit score: Thoroughly review your credit report for errors. Mistakes happen, and some of them can bring down your score. You can file a dispute online to correct or remove the information.

Recommended: Using a Personal Loan to Pay Off a Credit Card

The Takeaway

Credit scores, calculated based on information in your credit report, influence the interest rates you qualify for on loans and credit cards. The higher your score, the less you’ll likely pay in interest. The factors that determine your score include your history of on-time payments, your total debt compared to the amount of credit available to you, the types of debt you have managed, how much credit you have recently sought, and the age of your accounts. 

One of the best ways to build your credit score is to pay down credit card debt. A common way to consolidate high-interest credit card debt is with a low-interest personal loan. 

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

What are the levels of credit ratings?

The levels of credit ratings are typically:

•   Excellent (or Exceptional): 800-850

•   Very good: 740-799

•   Good: 670-739

•   Fair: 580-669

•   Poor: 300-579

How does the credit rating scale work?

Credit rating scales typically work by factoring in various indicators of an individual’s creditworthiness. For example, common components of your credit score will be your history of on-time payments, your credit utilization ratio, the length of your credit history, your credit mix, and how many new accounts you have applied for and how recently. These can indicate how well you have managed debt in the past and how likely you are to be responsible with credit in the future. 

How rare is a 700 credit score?

The current average credit score in the U.S. is 714, so a score of 700 or higher is not that rare. To be more specific, recent reports indicate that 17% of Americans have a score between 700-749, 24% are between 750-799, and 23% are between 800-850. In addition, credit scores tend to be higher among older generations.

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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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A Roth IRA offers a tax-advantaged way to save for retirement. Contributions to a Roth IRA are made with after-tax dollars, and qualified withdrawals in retirement are tax-free. Individuals with earned income up to certain limits may be eligible to contribute to a Roth IRA.

A Roth IRA also has some potential drawbacks, however. Weighing the pros and cons of a Roth IRA can help you decide whether it’s a good fit in your retirement portfolio.

What Is a Roth IRA?

A Roth IRA is an individual retirement account that’s funded with after-tax dollars. That means you can’t deduct Roth contributions from your taxes at the time you make them. But in retirement, at age 59 ½ and older, qualified withdrawals are tax-free. That’s the most straightforward way of defining a Roth IRA, and it’s also one of the reasons some investors are drawn to it.

You can have a Roth IRA in addition to a 401(k) or other workplace retirement savings plan. You could also open a Roth IRA to help save for retirement if you don’t have access to an employer-sponsored retirement plan.

The IRS sets annual contribution limits for Roth IRAs, and these limits are adjusted periodically for inflation. For the 2024 tax year, the maximum allowed contribution is $7,000. Those age 50 and older can make an additional catch-up contribution of $1,000 for a total contribution of $8,000.

Roth IRA Eligibility

To open a Roth IRA, you must have earned income, but one of the cons of a Roth IRA is that there are limits on how much you can earn to be eligible.

The chart below illustrates what you can contribute to a Roth IRA based on your modified adjusted gross income (MAGI) and tax filing status.

Filing status	2024 MAGI	Roth IRA contribution allowed
Single	Up to $146,000	$7,000 ($8,000 for those 50 and older)
	From $146,000 to $161,000	Partial contribution
	$161,000 or more	$0
Married, filing jointly	Up to $230,000	$7,000 ($8,000 for those 50 and older)
	From $230,000 to $240,000	Partial contribution
	$240,000 or more	$0
Married, filing separately	Less than $10,000	Partial contribution
	$10,000 and more	$0

As you can see, high-income earners may be ineligible for a Roth. You could, however, make contributions to a traditional IRA instead.

Roth IRA vs. Traditional IRA

A traditional IRA is also a tax-advantaged individual retirement account. Traditional IRAs have the same annual contribution limits as Roth IRAs. The main difference between a traditional vs. Roth IRA is their tax treatment.

Traditional IRAs are funded with pre-tax dollars. That means you may be eligible to deduct some or all of the contributions you make each year. In retirement, you’ll pay income tax on qualified withdrawals.

The amount you can deduct in traditional IRA contributions depends on your income, tax filing status, and whether you’re covered by a retirement plan at work.

What Are the Pros and Cons of a Roth IRA?

Saving for retirement in a Roth IRA has advantages, but it may not be the right option for everyone. Here are pros and cons of Roth IRAs.

Pros of a Roth IRA

There are several advantages of a Roth IRA, including:

Tax-Free Growth and Withdrawals

Because Roth IRAs are funded with after-tax dollars, you’ve already paid tax on the money you contribute. Your money grows tax-free while it’s invested, and when you withdraw it in retirement, you pay no taxes on it.

Tax-free withdrawals are beneficial if you expect your income to be higher in retirement than it is during your working years. Any money you take out of a Roth IRA at age 59 ½ or older wouldn’t increase your tax liability as long as it’s a qualified withdrawal.

No Required Minimum Distributions

With traditional IRAs, account holders must begin taking required minimum distributions (known as RMDs) from their account annually once they reach age 73 (assuming they reach age 72 in 2023 or later). If you don’t withdraw the required amount on time, you are subject to a tax penalty.

Roth IRAs do not have RMDs. You can leave the money in your account for as long as you like.

Contributions Can Be Withdrawn Penalty-Free

Ideally, the concept of a Roth IRA is to leave your money in the account until retirement. At age 59 ½ you can begin taking distributions without facing a 10% early withdrawal penalty. However, you can withdraw the contributions you make to a Roth IRA penalty-free at any time.

Your earnings are a different matter. You cannot withdraw your earnings before age 59 ½ without incurring taxes and penalties.

Cons of a Roth IRA

There are some drawbacks to an IRA, which mean these accounts may not be a good fit for everyone. These are the main cons of a Roth IRA to consider.

No Tax Deduction

Roth IRAs don’t offer a tax deduction for the contributions you make. Instead, you have to wait until retirement to reap the tax benefits. Tax-free withdrawals in your golden years could be an advantage, however, if you anticipate being in a higher tax bracket in retirement.

Income Limits Apply

Earning a higher income could put a Roth IRA out of reach for certain individuals, as our chart above indicates. If you’re not eligible for a Roth because of your earnings, you could consider a backdoor Roth IRA.

With a backdoor Roth, you make nondeductible contributions to a traditional IRA and then convert that IRA to a Roth IRA. However, since you’re moving pre-tax dollars into an after-tax account, you’ll owe income taxes on a Roth IRA conversion at the time you complete it, which could be costly.

The 5-Year Rule

Unlike traditional IRAs, Roth IRA accounts are subject to the 5-year rule. This rule says that, barring certain exceptions, your account must be open for at least five years before you can withdraw the earnings tax- and penalty-free at age 59 ½. The 5-year rule also applies to IRA conversions.

Setting Up a Roth IRA

Opening a Roth IRA is relatively easy. You choose where to open the account, fill out the required paperwork, designate a beneficiary, and fund your account.

Like many other investment accounts, you can open a Roth IRA through an online brokerage and link a bank account to it to make your first contribution.

Once you add funds to your IRA, you can decide how to invest them. Typically, brokerages offer options such as mutual funds and index funds. If you’re looking for alternative investments you may want to consider opening a self-directed IRA instead.

Roth IRA Withdrawal Rules

You can withdraw your Roth IRA contributions at any time without taxes or penalties. However, when it comes to earnings, Roth IRA withdrawal rules can be complicated since you have to factor in the five-year rule.

To help simplify things, this at-a-glance chart shows how withdrawals of earnings from a Roth IRA work and when taxes and penalties apply.

Your age	The account has been open less than five years	The account has been open for five years or more
Under 59 ½	Withdrawals of earnings are subject to taxes and penalties, unless an exception (like a disability) applies.	Withdrawals of earnings are not subject to taxes if the money is used for a first-home purchase or the account holder becomes disabled or passes away.
59 ½ or older	Withdrawals of earnings are subject to taxes, but not penalties.	Withdrawals of earnings are tax- and penalty-free.

Naming a Trust as Your Roth IRA Beneficiary

When you set up a Roth IRA, you need to name a beneficiary. Your beneficiary inherits the money in your Roth IRA after your death.

You can name an individual such as your spouse or child as your IRA beneficiary. You can also designate a trust as your beneficiary. A trust is a legal entity that you transfer your assets to. It’s administered by a trustee who manages your assets for you, according to your wishes.

For example, you might name a trust as the beneficiary of your Roth IRA if you’d like a say in what happens to your assets once you pass away. If you leave your IRA to an individual, they can do what they like with it. A trust allows you to leave specific instructions about how the assets in the trust can be used.

The Takeaway

A Roth IRA offers some unique benefits when it comes to retirement savings. With a Roth IRA, your money grows tax-free, you can make tax-free qualified withdrawals in retirement, and there’s no need for RMDs.

But not everyone is eligible to open a Roth IRA. There are income limits on these accounts, plus you must have funded a Roth for at least five years in order to make qualified withdrawals of your earnings without facing taxes and a penalty.

For those who are eligible for a Roth IRA, the prospect of tax-free withdrawals in retirement may make the potential downsides worth it. Consider all the pros and cons of a Roth IRA to make an informed decision about whether this type of retirement account is right for you.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

FAQs

Are Roth IRAs considered a safe investment?

A Roth IRA is not an investment; it’s an individual retirement account into which you put money that you plan to invest. Your choice of investments, and your risk tolerance, can determine how “safe” your Roth IRA may be. When comparing different investments, consider the risk and possible reward of each one to determine if you’re comfortable with it.

Do Roth individual retirement accounts have income limits?

Roth IRAs do have income limits set by the IRS and updated annually that determine who can contribute. These limits are based on your modified adjusted gross income (MAGI). If your MAGI exceeds the limit allowed for your filing status, you won’t be able to make a Roth IRA contribution. For example, in 2024, a single person with a MAGI of $161,000 or more and a person married filing jointly with a MAGI of $240,000 or more are not eligible to contribute to a Roth IRA.

How much can you contribute to a Roth IRA?

The annual Roth IRA contribution limit is set by the IRS. For the 2024 tax year, the maximum contribution allowed is $7,000, unless you’re 50 or older. In that case, you could contribute an additional $1,000 in catch-up contributions, for a total of $8,000 for the year.

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Photo credit: iStock/Lusyaya

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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