Everything You Need to Know About Credit Scores | Credit Cards

Do you know your credit score? If you don’t, you are not alone: Roughly 54% of Americans never check their score, according to 2020 research by Javelin that was sponsored by TransUnion.

The world of credit scores can be confusing and fraught with misinformation. Sometimes, what you assume will be good for your credit can actually lower your score – and vice versa. It might feel better to ignore your score completely.

However, taking the time to understand how credit scores work is crucial if you want a strong score. The good news is that a strong score can save you serious money over time.

What Is a Credit Score?

Whether you want to borrow money, open a utility account or rent an apartment, you’re asking an entity to trust in your ability to pay your bills on time. Lenders and landlords can’t call up every one of your credit card issuers since sophomore year and ask whether you’re good with money. Instead, they’re going to pull your credit score.

If your entire financial life could be boiled down to one number, it would be your credit score. It’s a three-digit figure that represents your history of borrowing and paying back money. The higher the score, the more trustworthy you’re considered to be by creditors.

Although you might scoff at the idea that your borrowing history could be reduced to a single arbitrary number, creditors take it seriously. A poor credit score could mean paying sky-high interest rates on credit cards and loans if you’re approved at all. You might be asked to pay a deposit upfront to open a cellphone account.

And that dream apartment you applied for? The landlord might hand the keys to a tenant with better credit instead.

On the other hand, having a high credit score means borrowing money at the lowest rates available. You don’t have to worry about losing out or paying more because you appear financially irresponsible.

Credit Score vs. Credit Report

You might assume that a credit score and a credit report are interchangeable. Though they are closely related, a credit report and a credit score are two separate items, and understanding the difference is important.

The three major credit bureaus – Experian, Equifax and TransUnion – collect your personal and financial information and compile it all into your credit report. Credit reports detail personally identifying information such as your name, address and Social Security number, as well as open and closed credit card accounts, loans, bills in collections, liens and bankruptcies.

You’re entitled to a free credit report from each of the three major bureaus through AnnualCreditReport.com, the only site federally authorized to provide free credit reports. You can check your credit reports weekly for free through the end of 2023 thanks to the extension of a program that began during the pandemic.

Using the information in your credit reports, companies will calculate a credit score that is then shared with banks, lenders and other organizations. Because there are multiple credit bureaus, you have more than one credit report and credit score.

FICO vs. VantageScore

FICO and VantageScore are the two main credit scoring systems.

According to data analytics company FICO, its credit scores are the most widely used by lenders. FICO produces credit scores based on the information in your credit reports. Because each credit bureau collects and reports your information independently, your FICO score will usually differ among them.

Lenders can access at least 16 versions of the FICO score for credit decisions as well as other credit scoring models, such as VantageScore.

In 2006, “The three credit bureaus started a joint venture and created VantageScore, a competing model for FICO scores,” says Lyn Alden, founder of Lyn Alden Investment Strategy, which provides market research to investors and financial professionals.

VantageScore has been gaining market share, but FICO is still the leading model.

What Are the Factors That Influence Your Credit Score?

While the specific formula is proprietary, the FICO model is based on these five main credit score factors:

  • Payment history (35%). Paying your bills on time is not only important to avoid late fees, but also the No. 1 factor to maintain a good FICO score. Indeed, payment history accounts for more than a third of your number. Even one or two missed payments can seriously hurt your score.
  • Amounts owed (30%). The total amount of debt you owe compared with your total available credit is another important factor. This is often referred to as your credit utilization ratio; the lower your ratio, the better.
  • Length of credit history (15%). Lenders want to know that you’ve been in the credit game for a while. Your credit score will continue to improve as your credit history grows.
  • Credit mix (10%). The diversity of your accounts also helps to boost your credit score. This shows that you can handle a variety of debts, such as credit cards, student loans or mortgages. Of course, your accounts need to be in good standing or they’ll damage your FICO score.
  • New credit (10%). Too many hard inquiries and new accounts within a short period of time will throw up a red flag that you might be struggling to keep up with your bills. If you’re rejected for a credit card, don’t try your luck elsewhere; wait several months and improve your credit first. If you’re rate shopping for loans, do so within about 45 days so all the credit inquiries are treated as one. Fortunately, this factor only makes up a small portion of your FICO score, meaning that opening a new account every now and then will have a negligible effect.

What about VantageScore? This model calculates scores based on six categories of credit information, each assigned its own weight, rather than FICO’s five.

The categories, in order of importance, are payment history, depth of credit (age and mix), credit utilization, recent credit, balances and available credit.

“Usually, FICO scores and VantageScores for the same individual are close in number,” Alden notes.

What Are Credit Score Ranges?

When it comes to what constitutes good or bad credit, each creditor has its own definition. Even so, credit scores break down into different ranges that indicate where a consumer generally falls on the spectrum of creditworthiness.

Most FICO scores fall in a range of 300 to 850, with higher scores indicating lower credit risk. Scores can be placed into one of these five categories:

  • Exceptional is 800 and above.
  • Very good is 740 to 799.
  • Good is 670 to 739.
  • Fair is 580 to 669.
  • Poor is 579 and lower.

The national average FICO credit score was 714 in 2022, the most recent data available and unchanged from 2021.

VantageScore 3.0 and 4.0 also use the same 300 to 850 range as FICO, but scores are categorized a bit differently:

  • Excellent is 750 to 850.
  • Good is 700 to 749.
  • Fair is 650 to 699.
  • Poor is 550 to 649.
  • Very poor is 300 to 549.

The average VantageScore is 700 as of February 2023.

What Is a Good Credit Score?

Don’t stress about maintaining a perfect credit score for every algorithm out there. If you have a solid FICO score, then you’re probably in good shape because 90% percent of lenders use this scoring model when evaluating applicants, according to FICO.

And you don’t need an 850 to get the best interest rates. Generally, a FICO score above 760, which is considered “very good,” gets you access to the same rates and terms as someone with perfect credit.

How to Check and Monitor Your Credit

Your credit score can fluctuate over time, which is why it’s a good idea to keep an eye on it. In the past, gaining access to your credit score meant subscribing to pricey and often unnecessary credit monitoring services. However, many companies have made strides in bringing a level of credit score visibility to consumers that only financial institutions used to enjoy.

Free FICO Scores

Because your FICO score is the one most often used by lenders, it’s the score you should be most interested in monitoring. There are a handful of sources you can rely on to provide your FICO score each month at no cost, such as credit card issuers and banks. For instance, Bank of America offers free FICO scores in partnership with TransUnion. Wells Fargo provides free FICO scores in partnership with Experian.

Free VantageScores

If your bank doesn’t offer free FICO scores, it likely offers free VantageScores. Again, VantageScore isn’t relied upon by lenders nearly as often as FICO is, but it does follow a similar scoring model. Chase, U.S. Bank and Capital One all provide free VantageScores through one of the three credit bureaus. You can also find a number of websites and apps for free credit scores.

How to Improve Your Credit Score

With so many types and sources of credit scores, working toward good credit might feel overwhelming. However, if you take a step back and focus on the basics, you can grow your credit score without too much thought.

Based on the five factors that affect your FICO score, these tips can help you build good credit over time:

  • Pay your bills on time. When it comes to your credit score, paying all of your bills on time is the single best thing you can do.
  • Keep your credit utilization low. Actively using credit cards is a great way to keep your credit score healthy. But aim to keep your credit utilization in the single digits, which means using less than 10% of your available credit. And always pay off the total each month if you can: You don’t have to carry a balance and incur interest charges to build good credit.
  • Start using credit early. You can start building credit at 18. Even if you open a credit card and charge $20 each month, you will make strides in building a strong history. And note: FICO treats open and closed accounts the same, so don’t be afraid to close a credit card that’s costing you money. Remember, however, that closing an account can increase your credit utilization rate because you’ll have a smaller overall pool of credit.
  • Diversify your credit. When it makes sense financially, explore other credit options, such as financing a car or consolidating credit card debt with a personal loan. Paying off a mix of credit types will help to boost your score.
  • Slow down on new accounts. As tempting as it is to chase every sign-up bonus and 0% APR offer, allow some breathing room between card applications to avoid looking like you are desperate for funds.

Credit scores might be complex, but sound money management doesn’t have to be. By paying your bills on time, spending wisely and only borrowing what you need, you should see your credit score soar.

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