Do you know your credit score? If you don’t, nobody else does: A 2020 TransUnion-Javelin survey indicated that 54% of Americans never check their credit score.
Misinformation and instability plague credit ratings. You may be shocked that acts you assume would boost your credit score may not. It may be easier to ignore your score.
Learning how credit ratings are determined is vital for a high score. The upside is that a high score may save money over time.
What is a Credit Score?
Credit scores are three-digit numbers that reflect creditworthiness. The FICO score range is 300-850. Better credit scores enhance loan acceptance and interest rates.
Your credit score is based on your credit history, including the number of accounts, debt, payment history, and other factors.
Credit scores help lenders determine if you are creditworthy, meaning they think you can repay loans on time.
How Credit Score is Created
Your credit score is based on your credit report. The top consumer credit companies are Equifax, Experian, and TransUnion. Lenders, credit card companies, and other financial organizations help each create a credit report.
Credit records show how you’ve utilized and repaired credit. Credit scoring methods like Vantage Score and FICO assist credit agencies quantify this information.
Though each credit score model has its own methodology, much of the data is the same. Your scores depend on how successfully you’ve paid your bills, how much credit you use, and what kind of debt you have (more on this later).
Credit scores can’t utilize your race, gender, religion, marital status, or country of birth, per federal law. It’s not always true that the American financial system is fair or that lending and credit scoring don’t consider prejudice. Contact the ACLU, spearheading the battle for banking racial fairness and other worthwhile programs, to learn more.
How Does Credit Score Work?
A strong credit score might affect your finances. It’s a significant factor in credit approval. If your credit score is high, lenders will lend more. Low credit scores make loan requests more likely to be denied.
Your interest rates may improve when your credit score rises. This may save money over time.
However, lenders prefer credit scores of 700 or higher, which may cut lending rates. Scores over 800 are excellent. Each lender has different credit score and loan requirements—a basic overview of credit score grouping.
- Excellent: 800 – 850
- Very Good: 740 – 799
- Sound: 670–739
- Fair: 580–669
- Poor: 300–579
Factors Impacting Credit Score
These are some of the things that credit score models usually look at:
- History of paying bills
- Current debts not paid
- The loan accounts you have and what kind they are
- How long your loans have been open to you
- Credit applications for new loans
- How much of your credit you’re using
The exact formula is secret, but the FICO model is based on these five key things that make up a credit score:
Not only is it important to avoid late fees, but paying your bills on time is also the most important thing you can do to keep your FICO score high. More than a third of your number comes from your payment history. Not making even a few bills on time can hurt your score.
Another critical factor is the difference between how much debt and cash you have available. The smaller your ratio, the better. This is also known as your credit utilization ratio.
Lenders want to see that you’ve had credit before. Your credit score will increase as more credit is added to your account.
Mix Of Credits (10%)
The different types of accounts you have also help your credit score. This shows you know how to handle different kinds of debt, like credit card debt, school loans, and mortgages. Of course, you need to keep your accounts in good order, or they will hurt your FICO score.
New Credit Worth 10%.
If you have many hard questions and new accounts in a short time, it could mean you are having trouble paying your bills. It would be best if you didn’t try again after being turned down for a credit card.
Instead, wait a few months and work on your credit. Rate-shopping for loans should be done within 45 days of each other so that all credit checks are seen as one. Luckily, this factor only makes up a small part of your FICO score, so starting a new account occasionally won’t make a difference.
What Are Credit Score Ranges?
Each borrower has different rules about what makes credit good or bad. Still, credit scores are broken down into ranges that show where a person usually goes on the scale of their creditworthiness
The majority of FICO scores are between 300 and 850. Higher scores mean that you are less likely to default on your debts. Scores can be put into one of these five groups:
- A score of 800 or more is exceptional.
- 740 to 799 is very good.
- Good is 670 and 739.
- 580 and are9 is fair.
- Poor means 579 or less.
The most current available data shows that the national average FICO credit score stayed the same from 2021 to 2022: 714.
FICO scores run from 300 to 850, as do Vantage Score 3.0 and 4.0. However, scores are organized a little differently:
- Good is between 781 and 850.
- Between 661 and 780 is good.
- The fair is 601 and 660.
- 500 to 600 is poor.
- 300 to 499 is very poor.
We now have 700 as the average Vantage Score as of February 2023.
VantageScore ranks the factors by their importance in figuring out a credit score in general. However, this will also rely on your specific credit report. The following is how VantageScore looks at factors:
Total credit usage, balance, and available credit: Extremely influential
Credit mix and experience: Highly influential
Payment history: Moderately influential
Age of credit history: Less influential
New accounts opened: Less influential
The number on your credit report can significantly affect how much money you have. If your credit score is high, you have a better chance of getting loans with better terms that will save you money. You can take steps to improve your credit score if you know what it is and how it is calculated.