You probably already know your credit score is an important factor for taking out loans or credit cards, but you probably still have a few questions regarding your credit score -- including what exact number is considered ideal.
Below, we break down all the frequently asked questions on everything regarding your credit.
What Is A Credit Score?
A credit score is a number that shows creditors and lenders how reliable you are at paying off your debts. Your credit score allows lenders to decide if -- and how much -- credit they extend.
Credit scores (which are also known as risk scores) are not determined by your bank, credit card companies, or lenders. Instead, they are provided by a third party entity.
There are many different credit scores, but the ones that most people refer to are your FICO® scores, which are based on information from the three major credit reporting bureaus: Experian, Equifax, and TransUnion.
Why Is A Good Credit Score So Important?
Credit scores are incredibly important since they greatly affect your financial situation. Along with determining your creditworthiness, these scores have other purposes:
- Banks and credit card companies use these scores to decide if they are willing to extend loans for you.
- A good credit score allows you to have a much lower interest rate on loans.
- They are occasionally used by companies when hiring new employees since steady payments show dependability.
- With a good credit score, you are eligible for lower interest rates on loans. (However, if you have bad credit, you can still find loans with less competitive interest rates.)
- A good credit score also helps you when renting an apartment, since your initial deposit may be lower if you have a high credit score.
- Your cell phone service bill can also be based on your credit score.
Your credit is taken into account for each financial decision you make, often to determine the type of loans and terms you receive.
Lenders examine the amount of debt you have, your debt to income ratio, the type of loan, your debt history, and any derogatory marks.
Why Is My Credit History Important?
Your credit history determines your credit score and takes the following into account: the length of your credit history, your payment history, your total amount of debt, and the amount of available credit. Lenders use this information to determine whether or not they will extend loans and credit cards to you.
What Factors Affect My Credit Score?
Depending on the type of credit scoring model you are using, your credit score may be affected by factors such as:
- Credit utilization
- Payment history (on time or late payments)
- Type of credit accounts
- Number of credit accounts
- Age of credit accounts
- Recently opened credit accounts
- Total debt
- Tax Liens
- Civil judgments
- Inquiries on your credit report
FICO grades your score on these factors (from most important to least important):
- Payment history on loans and credit cards
- Total debt owed
- Credit history length
- New credit accounts
- Types of credit accounts
VantageScore grades your score on these factors (from most important to least important):
- Payment history
- Age/type of credit and credit utilization
- Total balances and amount of debt
- Hard inquiries, available credit, and recent credit-related behavior
Factors that are not considered when determining your credit score, as outlined by the Consumer Credit Protection Act:
- Marital status
- Inquiries for employment reasons
- Checking your credit report
- Lender credit requests
Although this does not affect your credit score, lenders may consider the following when deciding whether or not to extend a loan to you:
- Employment history
Marriage does not affect your credit score because your credit scores, report, history remain separate. However, joint accounts may appear on both you and your spouse’s credit report.
All individuals with joint accounts (including those who do not have a high credit score or enough credit history to qualify for a loan) are responsible for payment, meaning that if one consumer misses a payment, everyone’s score is affected.
What Are The Credit Score Models And How Are They Calculated?
There are multiple credit score models used by different lenders with their own requirements. These credit scores detail your financial reliability and obligations to the credit bureaus. As usual, the higher your score, the more likely it is that you are approved for new lines of credit.
Although most consumers have hundreds of credit scores, these are the main ones used by lenders:
The FICO score (short for Fair Isaac Corporation) is the most important and commonly used credit score. These scores range from 300 to 850 and are based on these factors:
- 35% is your payment history.
- 30% of your score is the debts owed.
- 15% has to do with the length of your credit history. The longer your credit history, the higher your score.
- 10% is based on new credit lines and accounts you have opened recently, along with new credit inquiries and hard inquiries.
- 10% is based on how varied your accounts are and the different types of credit.
FICO changes their credit scoring method on occasion and currently has over 50 credit score models that are used for different types of debts such as mortgages, auto loans, or credit cards.
These scores are based on your payment and credit information. While each individual score varies, they should fall into a similar range.
The VantageScore was developed by the three major credit bureaus (Experian, Equifax, and TransUnion) in 2006 to rival FICO and create a more consistent and easier-to-apply scoring model.
VantageScore has a few notable differences from FICO:
- VantageScore does not weigh paid accounts negatively
- It takes natural disasters into consideration if you have been affected by one
- VantageScore allows you 14 days to shop for rates, as opposed to 45 days with FICO
- It distinguishes medical collections from other types of collections, ignores medical collections that are under six months old (allowing 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's benefits over FICO include:
- Better score accuracy and consistency
- Consumers with thin credit files to have increased access to credit
- Your rent payment data is incorporated into your score 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
Like the FICO score, the VantageScore also changes their credit score models to accurately reflect a consumer’s financial history and takes several factors into consideration (in the order of most to least important):
- The length and type of credit affect your score greatly. The longer you have had credit, the higher your score will be.
- Credit utilization, which divides your balance by your available credit. Consumers are encouraged to keep their utilization under 30%.
- Payment history is also important. Late payments can stay on the report for up to 7 years.
- Your total current and delinquent debt are factored into your score. The lower your debt, the higher your score.
- Recent credit-related behavior does not hold as much weight as other factors and includes new accounts and the number of hard inquiries.
- The amount of available credit you have holds low weight with your Vantage Score.
Credit Karma, which provides you with credit scores, credit reports, credit monitoring, and financial advice, uses a variant of the Vantage Score called V3.
While both your FICO score and VantageScore may be used by the same lender to determine your preapproval offers and final application approval, VantageScore is used more often if you have credit history under six months.
TransRisk, which is also known as the TransRisk New Account Score, was developed by TransUnion to detect a consumer’s risk on new (and not existing) accounts. This score is not used often by lenders because it specifically addresses new accounts.
The TransRisk score ranges from 100 to 900.
Experian's National Equivalency Score
As suggested by its name, this score was developed by Experian and assigns users a score between 0 to 1000.
Although Experian has not revealed the exact scoring model, it is based on credit length, payment history, types of credit, credit utilization, total balances, and the number of hard inquiries.
With this model, a score of 100 means that there is a 10% chance that an account will become delinquent in two years, a 200 means there is a 20% chance an account will become delinquent in two years, and so on.
Experian also provides a separate score range of 360 to 840, which is similar to FICO®.
CreditXpert Credit Score
The CreditXPert Score was developed by businesses to approve new candidates by looking at credit reports and finding ways to improve credit quickly.
CE Credit Score
The CE credit score was created to easily give to consumers for free at Quizzle. The credit score is on a scale of 330 to 830 and is based on credit length, history, types, utilization, and total balances.
The CE credit score is offered by Quicken Loans, which is CE Analytics's sister company.
Insurance companies have their own credit score model that determines how much of a risk a consumer may be. These scores range from 200 to 997 and are based on the type of insurance you are trying to acquire. Your premiums are often determined by this score.
This score can be bought or similar free scores can be found at sites like Credit Karma.
What Qualifies As A Good Credit Score?
Lenders (like banks, credit card companies, and car dealerships) use these scores to determine what interest rates and credit to offer consumers. A credit line like a credit card or small loan could have many scores considered “good,” but something more specific like a mortgage requires a much higher credit score. On average, mortgage lenders are looking for a FICO score that is at least above 640.
FICO is more regularly used and is broken down in the following way:
- Excellent: 800 to 850. 19.9% of applicants have this score and are the most likely to receive the best interest rates on loans.
- Great: 740 to 799. 18.2% of applicants have this score and are likely to receive above-average rates from lenders.
- Good: 670 to 783. 21.5% of applicants have this score and only 8% of this group are at risk of becoming delinquent.
- Fair: 580 to 669. 20.2% of applicants have this score and are considered to be unreliable borrowers.
- Poor: 300 to 579. 17% of consumers have this score and will most likely not be approved for credit; if they are, they usually have to pay a deposit or additional fees.
VantageScore 3.0 also ranges between 300 to 850 but is slightly different in terms of scoring:
- Excellent: 750 to 850. 30.3% of applicants have a score in this range and are the most likely to receive the best interest rates on loans and credit cards.
- Good: 700 to 749. 12.6% of applicants have this score and are more likely to be approved for credit with favorable interest rates.
- Fair: 650 to 699. 18.3% of applicants have this score and although they are likely to be approved, they are unlikely to receive low interest rates.
- Poor: 550 to 649. 34.1% of applicants have this score and although they may be approved for some credit, they will receive high interest rates rates and have larger deposits and down payments on homes and vehicles.
- Very Poor: 300 to 549. 16.7% of applicants have this score and are the least likely to be approved for credit.
What Are The Credit Scores Needed To Get The Best Loan Rates?
When you are searching for a car, home, or new line of credit, your credit score is typically pulled up by lenders to let them determine if you are eligible and what interest rates you receive:
- Apartments and homes: On average, consumers must have a score of 620 or above to be granted a lease. Anything lower than that may require a cosigner while popular rental areas may require a fee, deposit, several months of rent, or automatic payments from your checking account. The ideal range for a home loan and reasonable rates are above 640 and anything below that may result in you being denied for a loan. The best mortgage rates are generally given to consumers who have a credit score over 720. However, there are exceptions to this since some consumers may receive FHA loans or VA loans, both of which require a credit score of around 580 to 620. The FHA and VA do not actually provide loans but insure loans to banks that lend them to consumers.
New car: Many dealerships advertise that consumers can acquire cars with any type of credit, but good deals on cars are usually for those with excellent credit.
Interest rates on cars are generally broken down like the following:
- Super Prime: With a score over 740, interest rates run at 2.70%
- Prime: With a score of 680 - 739, interest rates run at 3.67%
- Nonprime: With a score of 620 - 679, interest rates run at 5.49%
- Subprime: With a score of 550 - 679, interest rates run at 9.25%
- Deep Subprime: With a score of less than 550, interest rates run at 12.42% With low scores in the subprime and deep subprime ranges, you may not be able to receive a loan -- and if you do, the interest rates are much higher. Ideally, you can get the best rates for a car loan with a score over 620. Studies have shown that consumers with a score of over 720 pay around $6,000 less on a 5-year car loan than those with credit scores in a nonprime range.
- Credit cards: Top-tier credit cards (like those with 0% balance transfers, rewards, and low interest rates) require higher credit scores above 720. Consumers with credit scores around 640 generally qualify for good credit cards with reasonable rates.
How Do I Find My Credit Score?
You can acquire your credit scores through a few methods:
- You are entitled to one free credit report every year at AnnualCreditReport.com.
- Many credit card companies also offer customers (and sometimes even non-customers) their FICO scores for free.
- You can purchase your FICO Score at FICO’s website, www.myfico.com.
- Your VantageScore can be bought at VantageScore’s website, www.vantagescore.com.
- Some banks and credit cards offer credit score monitoring for a price, but they may not be the most commonly used scores (FICO and VantageScore).
- Credit monitoring sites like CreditKarma or Credit.com may offer your scores for free or for a monthly fee.
How Do I Improve My Credit Score?
If you are looking to fix your credit there are some steps you can take:
- Pay your accounts and creditors on time
- Keep your credit utilization low by using less than 30% of the available credit
- Lower your debt to income ratio
- Pay off your credit cards
- Use a credit repair service or DIY credit repair to remove any erroneous or unverifiable items (like late payments, charge-offs, collections, tax liens, and more) from your credit reports
Achieving a good credit score can take time, but you can start building credit by taking a few steps:
- If you are new to credit, you may not have an established credit score. In this case, you can start to build credit by starting with a credit card. If you are under 21, find a cosigner (like a parent) and add them as an authorized user.
- You can open a secured credit card or an account with a bank or credit union that has a small credit limit.
- Consider taking out a credit builder loan.
- 20% of consumers have found errors on their credit reports. In these cases, you can dispute these items with bureaus on your own or hire a credit repair service to do the legwork for you. Around 80% of consumers who have disputed erroneous items have successfully removed them.
Need more information on where to start your credit repair journey? Look to our reputable credit repair services to help you get started.
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