Having a good credit score is more than just a number—it’s your ticket to financial freedom. It can mean the difference between getting approved for a loan or rejected, securing a low-interest rate on a mortgage, or even landing your dream apartment. If you’ve ever found yourself scratching your head when lenders mention this three-digit figure, then this comprehensive guide is for you.
Understanding Credit Scores
What is a credit score?
“Credit” means being able to get something now and pay for it later. A credit score is a three-digit number that tells lenders how trustworthy you are when it comes to paying back money. It’s like a school report for your finances! Good scores, around 670 and up, show lenders you handle money well. Average scores, from 580 to 669, may make it a bit tougher to get good loan deals. Bad scores, less than 580, can make it quite hard to get loans.
This score is calculated from the information in your credit accounts, collected by companies called credit bureaus. The three biggest ones are Equifax, Experian, and TransUnion.
Key take ways
- Your credit score is derived from data in your credit reports and is represented by a three-digit figure between 300 and 850.
- The two most well-known credit scores are from VantageScore and FICO. Credit scoring agencies are assigned varying weights by individual scoring agencies, resulting in marginally different ratings.
- The data in your credit reports from the three major reporting agencies are Equifax, TransUnion, and Experian—is what determines your credit score using the FICO algorithm.
- About 90 percent of financial companies evaluate your score when considering whether to grant you a line of credit or loan.
- The two things that have the largest effects on your credit score are timely payments and credit usage, or how much of your available credit you’re really using.
- A credit score of 580 or lower is recognized as poor credit, while a score of 740 or above is recognized as extremely good or exceptional.
What is FICO Score?
FICO Score is a type of credit score created by the Fair Isaac Corporation. It’s the most common type of credit score used by banks when deciding if they will lend you money or give you a credit card. You have three FICO scores, one from each credit bureau: Experian, TransUnion, and Equifax. Each of these scores is based on different information.
Your main FICO score is the middle score of the three. So, if your scores are 720, 750, and 770, your main FICO score would be 750. Ideally, you want a score of 800 or more because it usually means you will get the best rates on cards and loans. A perfect score is 850, which is something to be proud of, but isn’t necessary to get good rates.
What is VantageScore Score?
VantageScore is one of the many credit scoring models that assess the information in your credit reports and generate a score indicating the likelihood of timely bill payments. You might have come across your VantageScore on educational websites or in your credit card statement. VantageScore Solutions, the consumer credit scoring company based in Stamford, Conn, has provided over 1 billion VantageScore credit scores directly to consumers from July 2016 to July 2017. Owned jointly by Equifax, Transunion, and Experian, the publisher of this blog, VantageScore Solutions LLC was established in 2006.
Understanding Credit Score Ranges and Your Creditworthiness
Credit score ranges can vary depending on the credit scoring model used (FICO versus VantageScore) and the credit bureau (Experian, Equifax, and TransUnion) that provides the score. Below, you can find estimated credit score ranges from Experian to determine where you fall:
- Very poor: 300 to 579
- Fair: 580 to 669
- Good: 670 to 739
- Very good: 740 to 799
- Excellent: 800 to 850
- Very poor: 300 to 499
- Poor: 500 to 600
- Fair: 601 to 660
- Good: 661 to 780
- Excellent: 781 to 850
Discover where you stand in the credit score range and understand your creditworthiness.
What Factors Affect Your Credit Score?
Credit scores are calculated differently depending on the credit scoring model. Here are the key factors FICO and VantageScore consider.
- Payment history: This is the most important factor that affects your credit score, accounting for 35% of it. It refers to whether you have paid your bills on time. Late or missed payments can significantly lower your score, while consistent on-time payments can improve it.
- Amounts owed: The amount of debt you owe is another significant factor, contributing 30% to your credit score. This includes not only the total amount of debt, but also how much of your available credit you are using. A high utilization rate can indicate that you may be overextended and struggling financially.
- Length of credit history: The length of time you have had credit accounts for 15% of your credit score. This includes the age of your oldest account, as well as the average age of all your accounts. Generally, a longer credit history is seen as more positive.
- New credit: Opening multiple new credit accounts within a short period of time can be seen as a red flag to lenders, as it may indicate that you are in financial trouble. This factor makes up 10% of your credit score.
- Credit mix: Having a diverse mix of credit accounts, such as credit cards, loans and mortgages, can show lenders that you are responsible with managing different types of debt. This factor accounts for 10% of your credit score.
- Extremely Influential: Payment History.
- Highly Influential: Type and Duration of Credit, Percentage of Credit Limit Used.
- Moderately Influential: Total Balances/Debt.
- Less Influential: Available Credit, Recent Credit Behavior, and Inquiries.
Understanding these factors is crucial for optimizing your credit score. Make sure to manage your payments, keep credit utilization low, maintain a good credit history, and be cautious while applying for new credit or loans.
How Do I Get the Highest Credit Score?
Want to achieve an excellent credit score? Here are some valuable tips to help you boost your creditworthiness:
- Make on-time payments. Maintaining a consistent payment history is crucial for your credit score, making it imperative to always pay on time. Utilizing autopay is an excellent method to guarantee on-time payments, or you can set up reminders in your calendar to stay organized.
- Pay in full. While making the minimum payment is important, paying off your entire balance each month can lower your utilization rate. (Utilization rate is calculated by dividing your total credit card balance by your total credit limit).
- Avoid opening too many accounts at once. Each time you apply for credit, it triggers an inquiry on your credit report. These inquiries can temporarily lower your credit score. Limit your applications and explore prequalification tools that don’t impact your credit score.
By following these tips, you can pave the way to an excellent credit score!
How to get a free credit score
Looking to obtain a free credit score? You’re in luck! There are numerous services available that provide complimentary access to your FICO® Score or VantageScore. Here are a few well-known resources to consider:
- *Experian Boost™ (FICO® Score)
- Discover Credit Scorecard (FICO® Score)
- CreditWise from Capital One (VantageScore)
- Chase Credit Journey (VantageScore)
Take advantage of these options to gain valuable insights into your credit health at absolutely no cost.
FICO® Score☉ vs. VantageScore
The two most commonly used credit scores are the FICO® Score and the VantageScore®. Although these scoring models share some similarities, they also have significant differences. Learn more about the distinctions between FICO® and VantageScore® credit scores in this article
|One credit account six months old, activity on one credit account in past six months
|One open credit account
|Different scoring models for each credit bureau, specialized versions for auto lenders and credit card companies
|Single model for all three credit bureaus
|300 to 850 for base score, 250 to 900 for bankcard and auto scoring models
|Using a 300 to 850 range. The earlier models had ranges of 501 to 990. According to VantageScore
|Used by 90% of top lenders
|Commonly used by credit monitoring services
|| Evaluation of Creditworthiness
|Better indicator for credit approval odds
|Helpful in evaluating creditworthiness
|Late Payment Considerations
|Late payments impact less if they occurred 2+ years ago
|Late payments can have a significant impact, regardless of when they occurred
|Impact of Credit Inquirie
|Less severe impact on the score, duration of impact is 12 months
|More severe impact, length of impact is 24 months
Why Are There So Many Different Credit Scores?
It’s common to find variations in your credit score across different sources. Multiple credit scores exist due to several factors. Credit scores can vary due to several reasons. Here are some main factors:
- Different Scoring Models: FICO and VantageScore are the primary credit scoring models, each using a slightly different formula to calculate scores.
- Different Credit Bureaus: Scores may vary based on the credit bureau. In the U.S., the major bureaus are Experian, Equifax, and TransUnion. Each may have slightly different credit history information, resulting in different scores.
- Different Scoring Model Versions: Both FICO and VantageScore have released multiple scoring model versions. Lenders may use different versions, leading to score discrepancies.
- Timing of Information: Credit bureaus update reports at different times, based on lenders reporting payment history. Thus, one bureau may have more up-to-date information, resulting in score differences.
- Different Lenders, Different Scores: Lenders may use different credit scores based on the loan type. For example, a mortgage lender might use a different score than a credit card company.
why Having a Good Credit Score Is Important
Having a good credit score is crucial for achieving your financial goals. It can greatly impact your ability to qualify for important loans like a home mortgage or car loan. Remember, maintaining a good credit score requires financial discipline, like paying bills on time, keeping debt levels low and managing credit responsibly over time.
Loan Eligibility: Lenders refer to your credit score to determine whether you qualify for a loan. A high score can increase your chances of approval.
Interest Rates: A good credit score can secure you lower interest rates on loans and credit cards, saving you significant money in the long run.
Renting or Buying a Home: Landlords and real estate agents often check credit scores to evaluate potential renters or buyers
How to Improve Your Credit Scores
To improve your credit scores, focus on the underlying factors that affect them. Here are some basic steps you can take:
- Make all payments on time: Late or missed payments can have a significant negative impact on your score.
- Keep your credit utilization low: Try to keep the amount of debt you owe at or below 30% of your available credit. This shows lenders that you are responsible with managing your debt.
- Don’t close old credit accounts: Even if you no longer use a credit card, it’s generally better to keep the account open as it helps with your length of credit history.
- Monitor your credit report regularly: Errors on your credit report can negatively affect your score. By checking it regularly, you can catch and correct any mistakes.
Be cautious when applying for new credit: As mentioned earlier, opening multiple new credit accounts in a short period of time can lower your score. Only apply for credit when necessary and avoid applying for too many at once
Common Credit Score Myths
There are many misconceptions surrounding credit scores. Let’s debunk a few.
Myth: Checking your credit report hurts your score.
Fact: Checking your own credit report does not impact your credit score; it’s known as a soft inquiry.
Myth: You only have one credit score.
Fact: You have multiple credit scores, each calculated differently.
Myth: Closing old credit cards will improve your score.
Fact: Closing old or inactive credit cards can actually lower your score by affecting your credit utilization ratio and the length of your credit history.
Why Your Credit Score Changed
Credit scores can change for various reasons, with new information being added to credit reports throughout the month. Specific events like late payments or new collection accounts can lower scores, while paying down credit card balances can increase them. Surprisingly, even positive actions like paying off a loan can cause a score drop if it was the only open installment account.
Lack of activity on credit cards can also lead to lower scores, so it’s recommended to use them for small monthly subscriptions and pay off the balance in full. It’s important to remember that credit scoring models are complex and consider the entire credit report, not just individual events.
Monitor Your Credit Report and Score
Monitor Your Credit Report and Score Checking your credit score right before applying for a new loan or credit card can help you understand your chances of qualifying for favorable terms. However, checking it well in advance gives you the opportunity to improve your score and potentially save a significant amount of money in interest. Experian provides free credit monitoring, which includes a complimentary score and report, as well as alerts in case of any suspicious changes in your report. By keeping track of your score, you can take proactive steps to enhance it, increasing your likelihood of qualifying for loans, credit cards, apartments, or insurance policies, all while improving your overall financial well-being.
Factors that don’t affect your credit scores
There are some things that are not included in credit score calculations, and these mostly have to do with demographic characteristics.
For example, your race or ethnicity, sex, marital status or age aren’t part of the calculation. Neither is your employment history — which can include things like your salary, title or employer — nor where you live.
Actively managing and improving your credit score is an essential part of your financial health. It’s not just about making your life easier today, but also safeguarding your financial future. With the tips and insights provided in this guide, you’re now equipped to take control of your credit and work towards achieving your financial goals. Remember to make all payments on time, keep your credit utilization low, monitor your credit report regularly, and be cautious when applying for new credit. Happy credit building!
- U.S. Government Publishing Office, USA.gov. “Credit Reports and Scores.”
- myFICO. “What Is a FICO Score?”
- FICO. “The Perfect Credit Score: Understanding the 850 FICO Score.”
- Experian. “What Are the Different Credit Scoring Ranges?”
- National Consumer Law Center. “Big Changes for Credit Reports, Improving Accuracy for Millions of Consumers.”
- Equifax. “What Is a Good Credit Score?”