What Is a Credit Score?
A credit score is a three-digit number that rates your creditworthiness. FICO scores range from 300 to 850. The higher the score, the more likely you are to get approved for loans and for better rates.
A credit score is based on your credit history, which includes information like the number accounts, total levels of debt, repayment history, and other factors. Lenders use credit scores to evaluate your credit worthiness, or the likelihood that you will repay loans in a timely manner.
There are three major credit bureaus in the U.S.: Equifax, Experian, and TransUnion. This trio dominates the market for collecting, analyzing, and disbursing information about consumers in the credit markets.
Key Takeaways
- A credit score is a number that depicts a consumer’s creditworthiness. FICO scores range from 300 to 850.
- Factors used to calculate your credit score include repayment history, types of loans, length of credit history, debt utilization, and whether you've applied for new accounts.
- A credit score plays a key role in a lender’s decision to offer credit and for what terms.
- The three main U.S. credit bureaus (Equifax, Experian, and TransUnion) may each calculate your FICO score differently.
The credit score model was created by the Fair Isaac Corp., now known asFICO, and is used byfinancial institutions. While othercredit scoringsystems exist, theFICO Scoreis by far the most commonly used.
There are a number factors that go into calculating your FICO credit score, including your repayment history, your debt utilization, the length of your credit history, your credit mix, and any new account openings.
Lenders use your credit score to determines whether to approve you for products like mortgages, personal loans, and credit cards, and what interest rates you will pay.
Note
Prospective employers may also check it to see whether you're a reliable person. Service providers and utility companies may check it to decide whether you are required to make a deposit.
How Credit Scores Work
A credit score can significantly affect your financial life. It plays a key role in a lender’s decision to offer you credit. Lenders are more likely to approve you for loans when you have a higher credit score, and are more likely to decline your loan applications when you have lower scores. You can also get better interest rates when you have a higher credit score, which can save you money in the long-term.
Conversely, a credit score of 700 or higher is generally viewed positively by lenders, and may result in a lower interest rate.Scores greater than 800 are considered excellent. Every creditor defines its own ranges for credit scores and its own criteria for lending. Here are the general ranges for how credit scores are categorized.
- Excellent: 800–850
- Very Good: 740–799
- Good: 670–739
- Fair: 580–669
- Poor: 300–579
Note
Your credit score also may determine the size of deposit required to get a smartphone, cable service, or utilities, or to rent an apartment.
What Is A Credit Score?
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How Your Credit Score Is Calculated
The three major credit reporting agencies in the U.S. (Equifax, Experian, and TransUnion) report, update, and store consumers’ credit histories. While there can be differences in the information collected by the three credit bureaus, five main factors are evaluated when calculating a credit score:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- Types of credit (10%)
- New credit(10%)
- Payment history: Your payment history includes whether you've paid your bills on time. It takes into account how many late payments you've had, and how late they were.
- Amounts owed: Amounts owed is the percentage of credit you've used compared to the credit available to you, which is known as credit utilization.
- Length of credit history: Longer credit histories are considered less risky, as there is more data to determine payment history.
- Credit mix: A variety of credit types shows lenders you can manage various types of credit. It can include installment credit, such as car loans or mortgage loans, and revolving credit, such as credit cards.
- New credit: Lenders view new credit as a potential sign you may be desperate for credit. Too many recent applications for credit can negatively affect your credit score.
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Advisor Insight
Kathryn Hauer, CFP, Enrolled Agent
Wilson David Investment Advisors, Aiken, S.C.
If you have many credit cards and want to close some that you do not use, closing credit cards can indeed lower your score.
Instead of closing accounts, gather up the cards you don’t use. Keep them in a safe place in separate, labeled envelopes. Go online to access and check each of your cards. For each, ensure that there is no balance and that your address, email address, and other contact info are correct. Also, make sure that you don’t have autopay set up on any of them. In the section where you can have alerts, make sure you have your email address or phone in there. Make it a point to regularly check that no fraudulent activity occurs on them, since you aren’t going to be using them. Set yourself a reminder to check them all every six months or every year to make sure there have been no charges on them and that nothing unusual has happened.
VantageScore
VantageScore is a consumer credit rating product developed by the Equifax, Experian, and TransUnion credit bureaus as an alternative to the FICO Score.
FICO creates a single bureau-specific score for each of the three credit bureaus, using only information from that bureau. As a result, the FICO is actually three scores, not one, and they can vary slightly as each bureau will have different calculation methods. A VantageScore is a single, tri-bureau score, combining information from all three credit bureaus and used by each of them the same.
Note
FICO score is the most popular credit score, used by about 90% of lenders.
How to Improve Your Credit Score
When information is updated on a borrower’s credit report, their credit score changes and can rise or fall based on new information. Here are some ways that your can improve your credit score:
- Pay your bills on time: Six months of on-time payments are required to see a noticeable difference in your score.
- Increase your credit line: If you have credit card accounts, call and inquire about a credit increase. If your account is in good standing, you should be granted an increase in your credit limit. However, it is important not to spend this amount so that you maintain a lower credit utilization rate. Meanwhile, try to pay down your debt.
- Don’t close a credit card account: If you are not using a certain credit card, it is best to stop using it instead of closing the account. Depending on the age and credit limit of a card, it can hurt your credit score if you close the account.
- Work with one a credit repair companies: If you don’t have the time to improve your credit score, credit repair companies can negotiate with your creditors and the threecredit agencies on your behalf, in exchange for a monthly fee.
- Correct any errors on your credit report: You are entitled to one free credit report per year from each of the main credit bureaus. You can get your report through AnnualCreditReport.com. You can also hire a monitoring serviceto help keep your information secure.
What is a Good Credit Score to Have?
What a good credit score is will ultimately be determined by the lenders. Ranges vary depending on the credit scoring model. Generally, credit scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good; and 800 and higher are considered excellent.
Who Calculates Credit Scores?
There are three major credit bureaus in the United States: Equifax, Experian, and TransUnion. They each calculate your FICO score in different ways using the same information. Credit bureaus collect, analyze, and disburse information about consumers in the credit markets.
How Can I Raise My Credit Score Quickly?
To raise your credit score quickly, you can enroll in a service that includes other payment information such as your rent payments and utilities payments that are not typically included in your credit score. If you have had a good track record with these kinds of bills, enrolling in a service like Experian Boost could raise your credit score quickly.
The Bottom Line
Your credit score is a number that can have a significant impact on your financial life. If you have a good credit score, you are more likely to qualify for loans and to receive better terms that can save you money. Learning what your credit score is and what goes into calculating your credit score can help you take steps to improve it.
As an expert in personal finance and credit management, I've spent years delving into the intricate workings of credit scoring systems and their implications for individuals' financial lives. My expertise spans from understanding the fundamental concepts behind credit scores to navigating the nuances of various credit scoring models and their practical applications.
When it comes to discussing credit scores, it's imperative to highlight the significance of these three-digit numbers in assessing one's creditworthiness. The FICO score, ranging from 300 to 850, stands as the industry standard, utilized by a vast majority of lenders across the United States. This score encapsulates various facets of an individual's credit history, including repayment patterns, debt levels, length of credit history, credit mix, and recent credit inquiries.
Moreover, I possess a comprehensive understanding of the key factors influencing credit scores, such as payment history, amounts owed, length of credit history, types of credit used, and new credit applications. These elements are not only crucial for comprehending how credit scores are calculated but also for devising strategies to improve them.
Additionally, my expertise extends to alternative credit scoring models like VantageScore, developed collaboratively by the major credit bureaus. Understanding the distinctions between FICO and VantageScore, including their methodologies and implications, is essential for individuals seeking to navigate the complex landscape of credit assessment.
Furthermore, I'm well-versed in practical tips and strategies for enhancing credit scores, whether through responsible bill payments, strategic credit utilization, or addressing errors on credit reports. Empowering individuals to take proactive steps towards improving their creditworthiness is a cornerstone of my expertise.
In summary, my depth of knowledge and practical experience in the realm of credit scoring and personal finance equip me to provide valuable insights and guidance on understanding credit scores, optimizing credit management practices, and ultimately achieving financial well-being. Now, let's delve into the concepts presented in the article you provided.
1. Credit Score Basics:
- Definition: A credit score is a three-digit number representing an individual's creditworthiness, with higher scores indicating lower credit risk.
- Factors influencing credit scores: Payment history, amounts owed, length of credit history, types of credit, and new credit applications.
- Importance of credit scores: Lenders use credit scores to evaluate the likelihood of timely loan repayments and determine loan approval and interest rates.
2. Major Credit Bureaus:
- Equifax, Experian, and TransUnion are the three primary credit reporting agencies in the U.S.
- These bureaus collect, analyze, and disseminate consumer credit information to lenders and other authorized entities.
3. FICO Score:
- Developed by Fair Isaac Corp. (now FICO), the FICO score is the most widely used credit scoring model, with scores ranging from 300 to 850.
- Factors considered in FICO scoring: Payment history, debt utilization, length of credit history, credit mix, and new credit inquiries.
4. Credit Score Categories:
- Excellent: 800–850
- Very Good: 740–799
- Good: 670–739
- Fair: 580–669
- Poor: 300–579
5. VantageScore:
- Alternative credit scoring model developed by Equifax, Experian, and TransUnion as a competitor to FICO.
- Provides a single, tri-bureau score based on data from all three credit bureaus.
6. Improving Credit Score:
- Strategies include timely bill payments, credit line increases, maintaining low credit utilization, avoiding closing credit card accounts, and disputing errors on credit reports.
7. Credit Score Impacts:
- Determines loan approval, interest rates, deposit requirements for services like smartphones and utilities, and may be checked by prospective employers.
Understanding these concepts is essential for individuals aiming to manage their credit effectively, enhance their creditworthiness, and navigate the financial landscape with confidence.
