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Your credit score is a three-digit number that plays an important role in your financial health and opportunities. It can impact many aspects of your life, including your ability to get loans and credit cards. Below, we’ll explore what a credit score is, how it’s calculated, and what you can do to check and improve it.
- A credit score is a number that indicates your creditworthiness to potential lenders.
- Credit scores range from 300 to 850 and are based on several different factors related to your credit usage.
- Your credit score affects your ability to qualify for loans and credit cards.
- The average credit score is 698.
Credit Scoring Models
Credit scores are generated using many different models. FICO is the most commonly used credit score monitoring that’s been around since 1989. VantageScore, which was introduced in 2006 is another example of a commonly used model.
While both FICO and VantageScore use similar factors to calculate your credit score, these factors are weighted differently. For example, FICO gives more weight to payment history whereas VantageScore focuses on balances and total credit usage.
It’s important to note that there are other types of credit scoring models, such as auto insurance credit scores and home insurance credit scores. However, these models aren’t used as often as FICO and VantageScore.
FICO Score Model
FICO credit scores are calculated using the following criteria:
- Payment history: 35%
- Amounts owed: 30%
- Credit history length: 15%
- Credit mix: 10%
- New credit: 10%
FICO’s Credit Score Rankings
Here’s a look at how FICO credit scores are ranked:
- Exceptional: 800 to 850
- Very good: 70 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
VantageSorce 4.0 credit scores are calculated using the following criteria:
- Payment history: 41%
- Depth of credit: 20%
- Credit utilization: 20%
- Balances: 11%
- Recent credit: 6%
- Available credit: 2%
VantageScore’s Credit Score Rankings
The rankings for VantageScore are as follows:
- Superprime: 781 to 850
- Prime: 661 to 780
- Near prime: 601 to 660
- Subprime: 300 to 600
Why Are My FICO Score and Vantagescore Different?
Even though your FICO score and VantageScore both accurately measure your credit history, their calculations are slightly different. FICO, for example, prioritizes timely payments and VantageScore highly considers your balances and how you use your credit. As a result, these two numbers won’t be exactly the same.
How Your Credit Score is Calculated
Using information from your credit report, your credit score is calculated using five criteria, including:
- Payment history: Your payment history shows whether or not you make on-time payments on your credit cards, mortgage, car loans, and other bills. Even one late or missed payment can bring down your score.
- Amounts owed: Amounts owed explains your levels of debt. The less debt you have, the higher credit score you’ll have.
- Credit history length: This refers to how long each of your accounts have been open. If your accounts have been open for a while and you’ve made timely payments on them, your credit score will likely reap the benefits.
- Credit mix: Your credit mix includes various types of accounts you have open. If you have credit cards, mortgages, car loans, and student loans, for example your credit mix is diverse and will help your credit score.
- New credit: If you open up too many credit accounts in a short period of time, your credit score might suffer. That’s why, it’s a good idea to only apply for new credit when you absolutely need to and you have a good chance of getting approved.
Factors That Don’t Affect Your Credit Scores
Now that you know which factors do have an impact on your credit scores, you might be wondering which ones don’t. You might be surprised to learn that the following factors won’t have any influence on your credit score.
- Marital status
- Education level
- Political party
- Interest rates you’ve received
- Credit application denials
- Use of credit counseling or debt relief services
Credit Reporting Agencies
Credit scores are calculated by information found on credit reports. These credit reports are generated by credit reporting agencies. There are three major credit reporting agencies including:
- Equifax: Equifax was founded in 1899 in Atlanta, Georgia. It offers credit reports, as well as fraud detection products, marketing and risk management services.
- Experian: Experian is the result of two private equity firms, Brian Capital and Thomas H. Lee Partners. It’s been around since 1996 and provides free and paid credit score services.
- Transunion: Transunion’s roots go back to 1968 when it was the parent company of Union Tank Car Company, a railcar leasing firm. Today, it offers credit scores in addition to credit portfolio management, debt recovery, fraud prevention, and other business services.
How To Check Your Credit Score
As a consumer, you can visit AnnualCreditReport.com and access free copies from the three major credit reporting agencies, Equifax, Experian, and Transunion. Remember, that your credit reports are not the same as your credit score as your score is calculated with information on your reports.
If you’d like to check your credit score, you may be able to through your bank, credit union, or lender. Many of these financial institutions include credit scores on monthly statements or offer the option to check them via their online portals. You can also check your credit scores through free credit monitoring services, such as Mint or Credit Karma.
Why You Have Different Credit Scores
You have many different credit scores and might notice the variations between them if you monitor your credit through different services. Your scores might be different because each credit scoring model generates different scores. Also, your score may be different depending on when it was generated. In addition, different lenders may place more emphasis on certain criteria than others. For example, an auto lender may look for a credit score that focuses on auto loan payment history, according to Experian.
Why Your Credit Score Is Important
There are a number of reasons your credit score is important. Since lenders use credit scores to assess the risk associated with potential borrowers, higher credit scores mean less risk.
Also, your credit score can affect your ability to qualify for personal loans for excellent credit with better terms. If you do qualify for a loan, your score may play a role in determining how much a lender will offer and at what interest rates. Additionally, your credit score is crucial if you want to take out a credit card, car loan, or mortgage. Keep in mind that some employers, landlords, and insurance companies also consider credit scores.
How to Improve Your Credit
Fortunately, you have the ability to change your credit score and improve it if you believe it’s low.
Here are some tips to help you boost your score
- Always pay your bills on-time. Do your best to make timely payments on all your bills, including your mortgage, car loans, credit cards, and student loans. You might want to set up calendar reminders or enroll in autopay to make this easier.
- Apply for and use credit cards. If you apply for credit cards, make purchases with them, and pay your balances in full every time, your credit score will likely benefit. Note that applying for too much credit in a short period can harm your score.
- Watch your credit utilization. Credit utilization shows how much of your available credit you actually use. To calculate your credit utilization ratio, add up all your balances, divide them by your total credit limits, and multiply by 100. Aim to keep it below 30%.
The Connection Between Loans and Credit Score
When you take out a loan, like a mortgage, it will affect your credit score. If you make on-time payments on your mortgage, your credit score may improve. On the other hand, late or missed mortgage payments can cause your credit score to take a hit.
While each lender has their own unique credit score requirements for products like mortgages and personal loans, most look for good to excellent credit scores. Fortunately, some lenders are lenient and willing to lend to borrowers with fair credit or bad credit.
If you do take out a mortgage or personal loan, be responsible with repayments so you can build and improve your credit. By doing so, you’ll open the doors to low rates and favorable terms down the road.
Credit scores show how creditworthy or responsible of a borrower you are. These figures can impact your ability to qualify for financing and affect the types of rates and terms you may get. Now that you know the answer to ‘what is a credit score,' it's a good idea to find out what yours is and improve it if necessary. Best of luck!