Everything You Need To Know About Your Credit Score

The Credit Review
December 13, 2019 Credit Repair
Everything You Need To Know About Your Credit Score

Your credit score plays an important role in your financial health and decisions. Each time you apply for a credit card or loan, your terms and interest rates are based on your creditworthiness.

Understanding your credit score is key to making any serious financial investments. Below, we break down everything you need to know about your credit score: what it is, the history, the different types of scores, and how to improve it.

The History Of Credit Scores

In the past, lenders would look to a potential borrower's credit reports and word of mouth on the applicant's character to determine their creditworthiness. This process was often biased, unfair, and time-consuming.

All a lender really wants to know is if they will be repaid and while current credit scores can assess this in a more impartial way, it took a while to get there.

In 1956, an engineer named Bill Fair and a mathematician named Earl Isaac created the Fair, Isaac and Company (later known as FICO) and the first unbiased credit scoring algorithm. This early credit scoring system became more widely available within the next couple of years; in 1989, the FICO® system that became industry standard was initially put into place.

The three major credit bureaus (Experian, Equifax, and TransUnion) keep track of the essential information that goes into factoring your score:

  • Equifax, previously known as the Retail Credit Company, originated in 1899. They were one of the earliest credit bureaus and would collect all types of information on consumers -- both financial details and personal information such as political opinions and marital issues. Because of the problems that resulted in them collecting this manner of information, the Fair Credit Reporting Act.
  • Experian was founded in 1996 and is the newest of the major credit bureaus.
  • TransUnion was originally founded as a railroad leasing organization in 1968 before eventually becoming a major credit bureau.

What Is A Credit Score And Why Is It Important?

Simply put, a credit score (also called a risk score) is used by lenders to measure your financial stability and how likely you are to repay debts such as a loan or credit card). When you set a new financial goal (such as taking out a personal loan, credit card, auto loan, or mortgage), your credit score determines if you are a trustworthy borrower and what kind of interest rates you will receive.

The most commonly used credit score is your FICO® score, which is rendered by using information from the three major credit bureaus: Experian, Equifax, and TransUnion. These bureaus use your credit file to create one different FICO® score per bureau. Every time the information in each of your credit reports changes, so does your score.

Your score can change daily or monthly, depending on how often your creditors report any changes or new activity. Since each credit bureau has different credit information on you, your score will vary slightly.

What Are The Types Of FICO® Scores?

There are actually multiple types of FICO® scores -- 49, to be exact. Each one focuses on the various lending requirements for the different lenders and is regularly updated to the latest version.

There are six major FICO® scores used by lenders for various purposes:

  • Generic FICO® score: This is used by lenders to determine your general credit risk.
  • Auto FICO® score: This score determines how likely you are to default on an auto loan or lease.
  • Credit card FICO® score: This is used to determine how likely you are to default on a credit card.
  • Installment loan FICO® score: This score is used to determine how likely you are to default on a large installment loan.
  • Mortgage FICO® score: This score is used by lenders to determine how likely you are to default on a mortgage loan.
  • Personal finance FICO® score: This determines how likely you are to default on a smaller installment loan.

What Is A Good FICO® Score?

As we mentioned, there are many different FICO® scores, so the score considered "good" varies greatly. This means that if you were to sign up for multiple credit monitoring sites, you would receive a different score with each one. Each of these sites uses a different algorithm to calculate your score.

The most commonly used FICO® score has a range of 300 to 850 and is normally broken down like this:

  • 800+: This is considered an exceptional FICO® score and allows you to have an easy application process to get new credit. Only 1% of consumers with this score are likely to become delinquent. While it is possible to have a perfect FICO® score of 850, only around 0.5% of consumers have attained this. Paying the entirety of your credit cards balances on time and not opening multiple accounts are good first steps to attaining this score.
  • 740 to 799: This score is considered to be an excellent FICO® score and well above the average. Consumers with excellent credit generally qualify for lower interest rates on loans and credit cards and only around 2% of consumers with excellent credit will become delinquent.
  • 670 to 739: This score is considered a good FICO® score and an average credit score. Around 8% of consumers with a good credit score will default on their payments and become delinquent.
  • 580 to 669: This score is considered a fair FICO® score and below the consumer average. Borrowers with this score are more likely to default on their loans, with around 28% becoming delinquent. Being approved for loans and credit become more difficult and those who are approved have to pay much higher interest rates.
  • 579 and below: Anything below 579 is considered a poor FICO® score and means you are more likely to be rejected for any credit cards and loans you apply for. You may also be required to put down a deposit for credit cards or utilities. Around 61% of consumers with a poor FICO® score become delinquent at some point in the future.

Some consumers do not even have a FICO® score. In order to generate a score, you must have a certain amount of credit information available and at least one open account that reports to the credit bureaus for at least six months. Below, we will provide more information on how to build a thin credit file.

As we mentioned earlier, your FICO® score determines whether or not you qualify for loans and credit lines. The exact number needed to qualify depends on the type of loan you are looking for.

Although these are not the exact scores needed, lenders usually look for scores in this range:

  • Auto loans: You need a minimum of 620 to qualify and a 740 or higher to receive the best interest rates.
  • Mortgages: You need a minimum of 640 to qualify and a 720 or higher to receive the best rates.
  • Low-interest credit cards: You need a minimum of 640 to qualify and a 720 or higher to receive the best rates.

Lenders may also look at your financial history before making any final decisions on whether or not you are approved for a loan.

For more information on the importance of FICO® scores, read our guide on how a good credit score can change your life.

How Are FICO® Scores Calculated?

Although there are many different FICO® scores, they are calculated similarly and are usually broken down like this:

  • 35% is your payment history. The majority of your score comes down to paying your bills on time. Late payments will damage your score, and the later a payment, the more damage it will do. Late payments include bankruptcies and any accounts in collections.
  • 30% is your amount owed, or how much debt you have in relation to your available credit. The less debt you owe, the better your score.
  • 15% is the length of your credit history, which includes how long you have had credit and the average age of your accounts.
  • 10% is new credit. This includes recent applications for credit. A hard inquiry can reduce your score for up to six months.
  • 10% is having a mix of credit types. Revolving credit like auto loans, mortgages, and credit cards improve your score.

The same criteria apply to other credit score models, although they are weighted differently.

Factors that do not contribute to calculating your score include your age, address, gender, occupation, salary, employment history, race, religion, nationality, or marital status. However, when it comes to approving an application for credit, lenders may look at your income or job.

How Do I Check My FICO® Score?

Unlike acquiring your credit reports, you will have to order your FICO® scores through the bureaus, a third party site, or Fair Isaac's site at MyFico.com.

If you order your FICO® scores at Equifax, Experian, and TransUnion, you will have to pay $19.95 per score from each individual bureau. Each of your three scores will be different since your credit information varies with each bureau.

Some banks and credit card issuers (including Bank of America, Citibank, and Discover) provide their customers with one or all monthly FICO® scores for free.

If you acquire your scores through a third party, be sure that you are purchasing your authentic FICO® score.

What Are Some Other Types Of Credit Scores?

Although FICO® scores are used by around 90% of lenders, there are other scores used to evaluate your credit report in a different way than FICO®.

VantageScore

Another score that is becoming more widely used is VantageScore, which was introduced in 2006 by the three major credit bureaus to rival FICO® and create a more consistent and easy-to-apply scoring model. The latest VantageScore -- the VantageScore 3.0 model -- is similar to the FICO® score since it uses a scoring range between 300 and 850.

Your VantageScore falls in the following ranges:

  • 781 to 850: Excellent
  • 661 to 780: Good
  • 601 to 660: Fair
  • 500 to 600: Poor
  • 300 to 499: Very Poor

The following factors are used to calculate your VantageScore, from most influential to least:

  • Payment history
  • Type and duration of credit
  • Percent of credit limit used
  • Total debt
  • Recent credit behavior and inquiries
  • Available credit

Although it is similar to your FICO® score in many regards, there are a few notable differences:

  • This score does not weigh paid accounts negatively.
  • Late mortgage payments impact your credit more than other late payments.
  • VantageScore takes natural disasters into consideration in the case you have been affected by one.
  • VantageScore only allows you 14 days to shop for rates, as opposed to 45 days with FICO®.
  • It distinguishes medical collections from other types of collections and ignores medical collections that are under six months old, which allows time for insurance payments to process, and penalizes medical collections less than other types of collections
  • VantageScore can better score consumers with thin credit history and recognize their financial behavioral patterns
  • VantageScore places a heavier emphasis on factors such as credit age and utilization

VantageScore offers several other benefits that include:

  • Better score accuracy and consistency
  • It allows those with thin credit files to have increased access to credit
  • VantageScore incorporates your rent payment data when it is present on the credit file
  • It eliminates paid collections
  • It is the first commercially available model to be provided to consumers for free
  • The scores are used by lenders, landlords, credit card companies, utility companies, telecom companies, and more
  • VantageScore scores around 30 million consumers who are unlikely to be scored through other scoring models without compromising standards

Both your FICO® score and VantageScore may be used by the same lender to determine your preapproval offers and final application approval. However, VantageScore is used more often if you have a short credit history, whereas FICO® is used if you have at least six months of credit history.

TransRisk Credit Score

The TransRisk credit score is based on information provided by TransUnion and can only be acquired through Credit Karma.

The exact information factored into your TransRisk score isn't known and there aren't many benefits from using this score since it's not used by lenders or creditors. The best use for the TransRisk score is to track your credit over a period of time.

FICO® SBSS

Small businesses can also have their own FICO® scores called FICO® SBSS (FICO® Small Business Scoring Service), which tells financial institutions whether or not they are eligible for a loan.

FICO® SBSS is one of the three main business credit scores and ranges from 0 to 300. Just like your individual FICO® score, the higher the score, the better your credit.

This score is calculated by combining your personal credit history, business credit history, and other financial information like payments to suppliers and vendors. FICO® SBSS scores are used to prequalify businesses for loan terms and amounts, which can run as high as $1 million.

Auto Insurance Score

Auto insurance uses its own type of credit score to calculate your insurance premiums. This is based on your credit report information and auto claims history.

Home Insurance Score

A home insurance score uses the information in your credit reports along with information on your home and neighborhood before issuing a premium.

How Can I Fix Bad Credit?

If you are looking to improve your credit -- or build your credit due to a thin credit file -- you have a few options:

  • Reduce your credit card balances. Having high credit utilization is seen in a negative light by creditors. Ideally, you want to use less than 30% of your available credit.
  • Avoid late payments, which can result in a huge hit against your credit.
  • Take out a secured credit card. This requires you to put down a security deposit (which is used as collateral), while your purchases are used to build your credit history.
  • Consider using a cosigner. A trusted family member or friend could cosign a credit card or add you as an authorized user to one of their credit accounts to build positive credit history. Keep in mind that if one user defaults on their payments, all parties will be negatively affected.
  • Take out a credit-builder loan, such as one offered through services like Self Lender. While you can't spend the loan funds, it shows creditors that you are serious about improving your financial health.
  • Consider credit repair. Check your credit report to see if there are any erroneous items that are damaging your score. (You can get your credit report through a credit monitoring service or receive one free copy a year with www.annualcreditreport.com). Like your credit score, your credit reports can help lenders decide on whether or not they will extend credit to you. Credit reports contain information on the total debt you have, debt-to-income ratio, types of credit, how long you have had credit accounts open, and any negative marks. Any derogatory or unsightly items could prevent you from receiving a loan. Look for incorrect items such as late payments that were paid on time, multiple accounts for the same debt, wrong amount of debt, and incorrect listings. You can dispute these yourself or look to a reputable credit repair company.

How do I know if I have a good credit score?

There are many different types of credit scores, so the score considered good varies based on which scale you are using. However, the most commonly used score is your FICO® score, which is broken down like this:

  • Exceptional: 800+
  • Excellent: 740 to 799
  • Good: 670 to 739
  • Fair: 580 to 669
  • Poor: 579 and below

What are the different types of credit scores?

Most consumers have multiple credit scores, although the FICO® score is the most commonly used one. Other types of credit scores include:

  • VantageScore
  • TransRisk Credit Score
  • FICO® SBSS
  • Auto Insurance Score
  • Home Insurance Score

What are some benefits of a good credit score?

A good credit score can help you with the following:

  • Renting a house or apartment (without putting down a hefty deposit)
  • Your mortgage payments will be lower
  • You will receive a lower down payment when you purchase a cell phone
  • Your utility bills will be lower
  • Your insurance premiums depend on it
  • Potential employers may look at your credit history to determine reliability
  • It will be easier to qualify for loans
  • You will receive lower rates on loans
  • You will qualify for better credit cards

What factors make up my credit score?

Your FICO® is made up of five factors:

  • Payment history: 35%
  • Credit utilization: 30%
  • Credit age: 15%
  • New credit: 15%
  • Types of credit: 10%

What negative items appear on my credit report?

Your credit reports can contain both positive and negative history. Items that negatively impact your credit include:

How can I improve my credit?

  • Consider credit repair and contact a credit repair service
  • Always pay your bills on time
  • Deal with past due accounts
  • Reduce your credit utilization
  • Keep old credit accounts open
  • Open new credit (but avoid applying for too much new credit)
  • Monitor your credit