How Credit Scores Work
Understand how your score is calculated & why it matters.
What is a Credit Score?
A credit score, sometimes called a credit rating, is a three-digit number that shows how well you’ve managed credit over time. It’s based on the information in your credit reports and helps lenders quickly decide how likely you are to repay money you borrow.
Credit scores typically range from 300 to 850. The higher your score, the better you appear to lenders. But your credit score isn’t just used by lenders; landlords, insurance companies, and even some employers may review it to assess your financial reliability. That’s why understanding your credit score – and what affects it – is an important step toward improving your overall financial health.
How Your Credit Score is Calculated
FICO® is the most popular scoring model used to calculate your credit score. Here are the five (5) factors they consider when calculating your credit rating.
Payment History
Late payments and seriously delinquent accounts can significantly impact your credit score.
Amount Owed
Try to keep your account balances low. If your credit utilization is too high, your credit score could drop.
Length of Credit History
The age (how long they’ve been open) and the number of accounts are considered when determining your score.
New Accounts
Recently opened accounts and inquiries may cause a slight fluctuation in your credit score.
Credit Mix
The types of credit you have (secured and unsecured) also play a small role in calculating your overall credit score.
Your payment history and the total debt owed have the largest impact (65%) on your overall credit score.
What is a Good Credit Rating?
Credit scores vary by model, but most fall between 300 and 850. Below are the ranges most lenders consider (along with information obtained in your credit report) when reviewing an application.
Seen as low-risk and given the best interest rates when approved for loans, credit cards, and other financial offers. Approximately 23% of Americans have excellent credit.
People in this category have a positive credit history and generally have no problem getting approved for loans and credit cards.
Lenders may still view those in this range as an acceptable risk, but interest rates are likely to be higher than those with very good or excellent credit.
Most creditors/lenders view people in this range as a higher risk. It’s more difficult to get approved for loans and credit cards with fair credit.
Those in the poor category are unlikely to get approved for new credit. If you fall in this range, you’ll need to take steps to improve your rating before applying for new credit.
FICO® vs. VantageScore®: What’s the Difference?
FICO® and VantageScore® are the two main credit scoring models used to calculate your credit score. Although both use a range of 300 to 850 and evaluate similar factors, they are developed by different organizations and weigh those factors slightly differently.
| FICO® |
|---|
| Created by the Fair Isaac Corporation |
| Used by about 90% of lenders for credit decisions |
| Places strong emphasis on payment history and credit utilization |
| Requires a longer credit history to generate a score |
| VantageScore® |
|---|
| Developed by the three major credit bureaus (Experian, Equifax, and TransUnion) |
| More commonly used for free credit monitoring tools |
| Can generate a score with a shorter credit history |
| May weigh recent credit behavior more heavily |
Both scores are meant to predict how likely you are to repay debt, but lenders most often rely on your FICO® score when making lending decisions. That’s why your scores may vary slightly depending on the model used.
How to Improve Your Credit Score
If your credit score is lower than you prefer, there are several strategies you can employ to improve it over time.
- Pay Your Bills Promptly. Always make sure your bills are paid before or by the due date. Set up automatic payments to ensure you’re never late!
- Reduce Your Balances. Work on bringing down existing balances, focusing on those with higher interest rates.
- Monitor Your Credit Utilization Ratio. Try to keep your credit utilization ratio below 30%, if possible.
- Limit New Credit. Avoid submitting applications for multiple accounts within a short period to minimize the impact on your score.
- Check Your Credit Reports Often. Regularly review your credit reports on all major bureaus. Report any inaccuracies ASAP.
By understanding the factors that contribute to your score and taking proactive steps to improve your credit, you can enhance your financial opportunities.
