If you've ever even considered applying for a credit card or a loan, you'll know that the phrase "credit score" gets tossed around, a lot. But what is a good credit score and how does it affect you? Keep reading to find out.
What is a credit score?
The short answer: a credit score is a three-digit number that tells lenders how much risk you pose as a lendee.
It sounds simple enough, but, it's actually it’s slightly more complicated than that. For instance, you can have more than one credit score and not all lenders use the same credit reporting agency to decide if they'll lend to you or not.
The first automated credit scoring model appeared in the 1950s, but it wasn't until Congress passed the Fair Credit Reporting Act in 1970 that the process was regulated. The Fair Crediting Act specifies which information the credit bureaus can collect and use as part of your credit score. Even with the regulations, there are three major reporting bureaus, each with slightly different scoring standards, so you could realistically have three different scores.
What credit score do you start with?
While it's not possible to have a credit score of 0, you can have no credit score. If you have never taken out any credit, or have a credit history that's shorter than six months, you won't have a score at all. Once people do get a score, it's based on how well they've used their credit to date. You could start with a very high credit score or a lower score, depending on your first six months of credit history.
What’s the best credit score you can get?
The highest credit score is between a 800 and 850 at most credit reporting agencies, except Transunion. Their Transrisk scoring model goes up to 900.
What’s the worst credit score you can get?
For most scoring agencies, the lowest score is 300, but depending on the scoring model, credit score ranges can start from as low as 250.
Factors That Determine Your Credit Score
While you may have slightly different credit scores depending on which reporting agency you look at, they all use the same information to determine your credit score. Information that will affect your credit score includes:
- Payment History. How often you paid your bills on time, and if you were late, how late your payments were.
- Credit Utilization Rate. The percentage of total available credit you are using (Includes loans and credit card balances).
- Credit Mix. The number, types, and age of your credit accounts.
- Your Total Debt. The total amount of all of your loans and credit cards.
- New Accounts. The age of your oldest accounts, and the number of new credit lines you have opened in the last several months.
- Number of Inquiries on Your Account. The number of times you've given banks or lenders permission to conduct a hard inquiry on your credit when applying for credit cards or loans. Too many inquiries in too little time can lower your score.
- Public Records. Records that show items such as bankruptcy will factor into determining your credit score.
Types of Credit Scores
The two major types of credit scores are FICO and VantageScore. However, some lenders have created their own scoring systems. Some lenders even use FICO or VantageScore as a jumping off point and then put that information into their own system to get their own score.
In most cases, you just need to be familiar with FICO and VantageScore:
The Fair Isaac Corporation provides FICO scores. It's the most popular credit score measurement and is customizable by industry and client needs. The FICO scoring model was introduced in 1989.
The VantageScore is a combination of information from Equifax, Experian, and Transunion. It launched in 2006.
What Is a Good FICO Score?
A good FICO score typically ranges from 740 to 799. The highest FICO scores are between 800 to 850.
“Good” and “excellent” FICO scores indicate to borrowers that you are a lower risk, which means you're more likely to pay your debt back on time.
FICO Score Ranges
FICO credit scores range from 300 to 850. Jumping up or down as little as 50 to 60 points can put you in a different score range completely. Here’s what it can mean:
Poor (300-559): You may not qualify for credit or be required to utilize a prepaid debit or secured credit card.
Fair (580-669): Scores in this category may be approved at higher interest rates or fees.
Good (670-739): Applicants in this range are less likely to become delinquent on future payments and may qualify for most types of credit.
Very Good (740-799): Scores in this range qualify for better interest rates and lower fees.
Excellent (800 to 850): Scores in the highest range are typically eligible for the best interest rates and higher borrowing limits.
What Factors Determine Your FICO score?
The FICO score takes five categories into consideration when factoring your three-digit score: Payment history, amounts owed, new credit, length of credit history, and credit mix. The score breakdown below shows you how much each section affects your total score:
- Payment History: 35%
- Amounts Owed: 30%
- Length of Credit History: 15%
- New Credit: 10%
- Credit Mix: 10%
If you’re trying to improve your credit score, the best thing you can do is make on-time payments and reduce the amount of total debt you owe. Those two categories make up 65% of your total score.
What Is a Good VantageScore?
VantageScore is similar to FICO, with slightly different ranges. The best credit scores on a VantageScore scale are between 750 and 850, with good scores falling between 700 and 749.
A VantageScore can range from 300 to 850. Gaps between score ranges are a bit higher with VantageScore.
Very Poor (300-549): Applicants aren't likely to be approved for credit in this range.
Poor (550-649): Scores may qualify credit approval but often have higher interest rates or larger deposit requirements.
Fair (650-699): Applicants are likely to be approved for most credit options, but may have higher interest rates.
Good (700-749): Scores in this range qualify for most credit options and they are likely to access better interest rates.
Excellent (750-850): Scores in this range qualify for better interest rates, higher loan limits and lower fees.
What Factors Determine Your VantageScore?
VantageScore takes into account five different factors including payment history, credit age/type, percent of credit used, recent credit behavior/ available credit, and total balance owed.
The score breakdown below shows you how each factor affects your score. Note that VantageScore has slightly different weights than the FICO.
- Payment History: 40%
- Age and type of credit: 21%
- Perfect of credit used: 20%
- Total balance owed: 11%
- Recent behavior and available credit: 8%
Payment history is more heavily weighed in the VantageScore and your mix of credit is more important than the total balance of your debt. Having a mix of revolving and installment debts and making payments on time make up 61 percent of your total score.
Which Credit Score is More Important?
It depends. VantageScore is better for people with a shorter credit history as it begins monitoring your credit in as little as one month, whereas a FICO score requires at least six months of credit history.
The FICO score has been around longer. First introduced in 1989, about 90% of lenders use the FICO score. In contrast, VantageScore was first introduced in 2006, and is not used by as many companies. If you're planning a major purchase, odds are your FICO score will be more heavily weighted by your lender.
Why Credit Scores Matter
When it comes to credit scores, there are often two camps of people: those who think a credit score is worth everything, and those who think it doesn't matter at all. The truth falls somewhere in the middle.
Generally speaking, your credit score may not directly affect your every daily life, but when it does matter, it really matters.
Lenders look at your credit score when you apply for personal loans, home loans, auto loans, student loans, and credit cards. If you have a higher credit score you're less likely to default on your debt, so the lender is more willing to give you lower interest rates and better loan terms. A lower credit score could cost you more over time because you may not qualify for the best interest rates or fees from a lender. In some cases, you may not qualify for financing at all.
Your credit score doesn't just affect your ability to borrow money. Other things your credit score can affect include insurance premiums, cable and internet accounts, cell phone purchases and your ability to rent an apartment. Some employers even ask to look at your credit history before making a hiring decision.
Your credit score is only part of your financial picture. Your credit report — which lenders also look at — offers a more complete view of your payment history and affects your credit score. Make sure to check your report at least once or twice per year to catch any errors.
How to Check Your Credit Score For Free
It's a common misconception that you have to pay for your credit score. There are several services like Credit Sesame that allow you to check your score free.
Many credit card companies also offer access to your credit score for free. It's worth noting that these scores can be different than your FICO score, but they can give you a close approximation of what the major scoring agencies are saying.
If you've applied for a mortgage or other loan and you are turned down, the lender is required to send you a notice as to why they've declined to loan you money and send your credit score information.
How To Improve Your Credit Score
Improving your credit score takes a lot of patience and a bit of work, especially if you've struggled to pay off debt, missed payments, or had bills sent to collections. Fortunately, the adage "times heals all wounds" is appropriate for credit scores. It may take months (or even years in some cases), but you can fix your credit and improve your score.
The most important things you can focus on to increase your credit score include making all of your debt payments on time and reducing credit card debt. As these two factors are major players in the credit-scoring formulas, they will have the largest impact over time.
Other things you can do is stop applying for new credit (at least for a little while), and leave accounts open, even after you've paid them off. Cut up the cards, toss them in the freezer or bury them in the yard if you don't trust yourself not to use them, but leave the accounts open to keep your credit history aging.
How many points does your credit score go down for an inquiry?
Typically, you'll lose 5 points or less for new inquiries. If you're shopping for a home or auto loan, credit reporting bureaus will lump all of the inquiries within about 14 days under one inquiry. So you can keep the score drop to a minimum by limiting your search time.
How often do credit scores get updated?
Credit scores are updated once per month. Lenders report their information to the credit bureaus once per month and the credit bureaus update your report accordingly, which then is reflected in your credit score.
Does my credit score show up on my credit report?
No. Your credit score is not part of your credit report. You can request a free credit report from Annual Credit Report once per year, or pay one of the bureaus — Equifax, for instance — to see your full credit report.
Can my boss see my credit score?
No. Potential employers may check your credit history, but they cannot check your score. The report they see isn't the same as the one lenders see.
Any inquiry your employer makes is a soft pull, so it won't affect your credit score. The report your employer sees is called an "employment screening," and it does not contain personal information like your birthdate.
How do you build credit for the first time?
If you’re establishing credit for the first time, there are a few things you can do.
- Apply for a secured credit card. You'll have to pay a refundable deposit in order to get a credit limit. The deposit is equal to or less than the card limit. You'll get your money back if you've paid your bill on time and can eventually graduate to an unsecured card.
- Get a co-signer. If you've never had a loan or credit card before, you may need to have a parent or friend cosign for you. This means they take responsibility for the debt if you don't pay it off. While this can be a helpful solution, you could put your friend or family member in a hard place if you don't pay your debt on time.
- Become an authorized user. One trick is to have someone put you as an authorized user on their credit card account. Parents sometimes add their older children as authorized users to help them build credit. The cardholder does not have to give the card to the user to help them build credit. This only works if the cardholder pays their bills on time and keeps the balance low.
- Consider a credit-builder loan. A lender deposits a certain amount of money into a secured savings account. The borrower sends regularly monthly payments to the lender until the for a fixed amount of time (anywhere from 6 months to two years). The borrower cannot access the loan until it's completely paid off, but the lender reports the on-time payments to creditors. Once the loan is paid off, you have a lump sum of money free and clear, and good payment history on your credit report.
Do credit scores merge after you get married?
No. Your credit score is always separate from your spouse. On occasion, personal information can get consolidated on your credit report, though, so make sure to check your credit report regularly and ask them to remove the information that isn't yours.
What’s a good credit score to apply for a credit card?
For the best rewards credit cards, you'll want a score in the 700 or 800s. This allows you to get the best rates and lowest fees. However, if your score is at least in the mid 600s, you'll likely qualify for a credit card, assuming you don't already have several credit cards with high balances. If you have a score lower than 580, you may want to prioritize improving your score and then applying once your credit score has increased.
What’s a good credit score to buy a car?
As always, the higher your score, the better your interest rate — which also affects your monthly payment. On average, borrowers should try to have a credit score of at least 650 when purchasing a used car. Buyers interested in a new car should typically aim for a credit score above 700.
What’s a good credit score to buy a house?
The credit score you'll need to purchase a home largely depends on the type of mortgage loan you hope to qualify for. Borrowers applying for an FHA or VA loan may qualify with a score as low as 580 if they bring a 3.5% down payment. If your score is lower than 580, you'll likely need to provide a 10% down payment.
If you apply for a conventional loan, you'll need a score of at least 620, though exact requirements can vary by lender.