If you have recently applied for a credit card, loan, or mortgage, you may know that your creditor checked your credit score before deciding whether or not to lend to you. But you may still be unsure about what exactly a credit score is or how it’s calculated. Here are some frequently asked questions about credit scores that could help to make sense of your score, and help you to develop the skills to improve it.
What Is a Credit Score?
A credit score is a number that symbolizes your creditworthiness based on your credit history. Lenders use this information to determine if you are safe to lend to—but it can be used for many other purposes, as well. Companies use your credit score to determine if they should approve you for things like:
- Credit cards and personal loans
- Mortgages, vehicles loans, and other kinds of property loans
- Private and federal student loans
- Certain jobs, including jobs in the government and financial sectors
- Utilities, phone plans, and property rental contracts
When you have a high credit score, you’re more likely to qualify and get the best rates. On the other hand, as your credit score decreases, it’ll be harder to find someone who will lend to you, and your rates will likely increase.
How Is Your Credit Score Determined?
Your score is determined by measuring different factors in your credit history. We’ll get into those factors below. The most trusted measure is the FICO score, created by the Fair Isaac Corporation, and used most widely to calculate a person’s creditworthiness.
On the other hand, the VantageScore was developed by a partnership between three credit reporting agencies: Equifax, Transunion, and Experian. It is also a measure of creditworthiness, but it’s used less often than the FICO Score.
Both FICO and VantageScore range from 300 to 850, but they’re calculated in slightly different ways. With both kinds of credit scoring models, the higher your score, the lower the risk for the lender. Here’s some tables that show how the different credit score ranges work:
|800-850||Exceptional||Almost guaranteed approval for most types |
of credit, including top credit cards with
the best rewards, the absolute lowest
interest rates and fees.
|740-799||Very Good||Likely approval for almost any type of |
credit and favorable rates and fees from
|670-739||Good||Likely credit approval, and competitive credit |
rates but not the ideal rates obtained by
“very good” and “exceptional” scorers.
Additionally, it may be harder to qualify for
some types of credit.
|580-669||Fair||Many lenders will approve applicants with |
“fair” credit but borrowers will be unlikely to
see very competitive intrest rates.
|300–579||Very Poor||Credit applicants may be required to |
pay a fee or deposit, and may not
be approved for credit at all.
Vantage Score Ranges
|750-850||Excellent||Applicants most likely to receive the best|
rates and most favorable terms on credit
|700-749||Good||Applicants likely to be approved for credit |
at competitive rates.
|650-699||Fair||Applicants may be approved for credit, but |
likely not at competitive rates.
|580-669||Poor||Applicants may be approved for some credit,|
though rates may be unfavorable and come
along with conditions such as larger down
|300-579||Very Poor||Applicants will not likely be approved for|
When looking at your credit score it’s important to be aware of which kind is being used so you have a clear understanding of where you stand. There are a number of different factors that affect your credit score, so it is also a good idea to understand what these are and how you can improve them.
What Factors Contribute to Your Credit Score?
There are five main factors for determining a person’s credit score: payment history, amounts owed, length of credit history, credit mix, and new credit. Let’s go over each credit score factor in order of importance to your FICO score.
- Payment History
The record of payments you have made to lenders in the past, and whether or not they were on time. This factor is the most important because it demonstrates your payment habits in a very transparent way, and is considered the best indicator of your ability to make payments in the future.
- Credit Utilization
The percentage of your available credit being actively used. If you are constantly at the upper edge of your available credit, say maxing out multiple cards, or only making only the minimum payments, you can be seen as a risky borrower. It is generally recommended that you keep your credit usage below 30% of your available credit.
- Length of Credit History
The length of time you have had open credit accounts. The longer your credit history the more data a lender has on your creditworthiness, so they have a clearer picture of your habits, and can minimize their risk.
- Credit Mix
The combination of credit accounts you have: credit cards, student loans, mortgages, car loans, etc. It is not necessarily a major factor in your score unless you have very little in the way of other factors represented in your credit history.
- New Credit
The number of new accounts you have opened at the time your credit score is being viewed. Several new accounts opened in a short time period can be a red flag to lenders, so it is best practice to let a significant period of time pass between opening new accounts.
As you read this, FICO is rolling out a new way of calculating credit scores called UltraFICO. This takes the established FICO score, which accounts for the factors mentioned above, and augments it with information from your bank account.
As UltraFICO gains more popularity, credit scores will be calculated differently—but it’s still unclear how drastically your score will change as a result. You can learn more about the UltraFICO score and how it might impact you.
What Makes a Good Credit Score?
Developing good credit is a matter of thinking about these different factors and how they impact your scores. Making on-time payments and keeping your credit utilization low may positively impact your score. The table below can be helpful to remembering the factors and their rate of impact.
|Payment history||Amounts owed||Length of credit history||Credit mix||New credit|
If you are striving for a good credit score, here are some actions that could help:
- Make sure to always make payments on time. You can even set up autopay on any account you are able to.
- Keep your credit utilization low. A good number to remember is under 30% of your available credit.
- Only borrow what you can actually pay back on time. Don’t use a credit card as a way of spending beyond your means.
- Always pay your balance in full each month. Carrying a balance month to month racks up interest and makes it harder to keep up with your payments.
In conclusion, it might take a little time for your credit score to get to the place you want it to be, but it doesn’t have to be stressful. You have all the tools you need to take charge of your score right at your fingertips; it’s just a matter of using them strategically.