What is a Credit Score?
A credit score is a three-digit number that rates your creditworthiness. FICO scores, which range from 300 to 850, are the most commonly used scores. A higher score increases your chances of loan approval and better rates.
A credit score is based on your credit history, which includes the number of accounts, total levels of debt, repayment history, and several other factors. Lenders use these scores to assess your likelihood of timely loan repayment.
In the U.S., three major credit bureaus collect, analyze, and manage credit information: Equifax, Experian, and TransUnion.
Key Insights
- Credit Score Factors: Factors influencing your credit score include repayment history, types of loans, credit history length, debt utilization, and new account applications.
- Importance for Lenders: Credit scores are critical in determining loan approvals and terms.
- Variances Among Bureaus: Equifax, Experian, and TransUnion may calculate your FICO score differently.
Credit Score Ranges
Here’s what your credit score range means:
- Excellent: 800-850
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 300-579
How Your Credit Score is Calculated
Credit scores are calculated based on five primary factors:
- Payment History (35%): Records of on-time payments and any late payments.
- Amounts Owed (30%): The proportion of used credit compared to the total credit available, known as credit utilization.
- Length of Credit History (15%): Older accounts can positively impact your score.
- Types of Credit (10%): A variety of credit types (e.g., installment loans, credit cards) can improve your score.
- New Credit (10%): Too many recent credit inquiries can negatively impact your score.
Enhancing Your Credit Score Expeditiously
To quickly raise your credit score:
- Timely Payments: Consistent, on-time bill payments can noticeably improve your score in six months.
- Increase Credit Limits: Request a credit limit increase but avoid spending more to keep credit utilization low.
- Keep Accounts Open: Instead of closing unused accounts, keep them open to maintain a longer credit history.
- Use Credit Repair Services: Engage with credit repair companies to negotiate with creditors and bureaus on your behalf.
- Correct Errors: Secure your free yearly credit report and correct any inaccuracies.
Better Credit with VantageScore
VantageScore, developed by the three major credit bureaus, evaluates creditworthiness differently from FICO, providing a tri-bureau score. Although FICO is used by about 90% of lenders, knowing both scores can be beneficial.
The Bottom Line
A good credit score opens the door to favorable loan conditions and significant financial opportunities. Understanding how your credit score is determined and taking steps to improve it can lead to better financial stability and success.
Notes
Prospective employers and service providers may check your credit score to determine reliability, which can affect deposit requirements for smartphones, utilities, and apartment rentals.
Related Terms: credit report, credit utilization, creditworthiness, debt management, FICO.
References
- Consumer Financial Protection Bureau. “What Is a Credit Score?”
- Cornell University, Legal Information Institute. “Credit Score”.
- MyFICO. “What’s in my FICO Score?”
- Experian. “What Is a Good Credit Score?”
- VantageScore, via Internet Archive. “How It Works”.
- FICO Score. “FICO® Scores Are Used by 90% of Top Lenders”.
- Experian. “Experian Boost”.
