What is a credit score?
A credit score is a number calculated by credit scoring models using information from your credit reports. Your credit score tells financial institutions your creditworthiness, which is essentially a grading scale that shows how good you are at managing your debts. A credit score ranges from 300 to 850.
There are two main players that major credit bureaus and other lenders look to for scores—FICO® and VantageScore.
FICO is the older and more widely used credit scoring model by lenders, while VantageScore is a newer model created by the three major credit bureaus—Equifax, Experian, and TransUnion.
What’s considered a good credit score?
Banks or lending institutions break down credit scores into categories to determine your qualifications as a borrower. Assuming you have FICO and VantageScore credit scores, you fall under one of the following categories:
FICO
- 800-850: Exceptional credit, resulting in great rates and terms
- 740-799: Above average credit, resulting in competitive rates and terms
- 670-739: Good credit, resulting in average rates and terms
- 580-669: Fair credit, resulting in worse-than-average interest rates
- 300-579: Poor credit, which means you may not be approved for loans or credit and would not qualify for favorable terms
VantageScore
- 781-850: Superprime, resulting in great rates and terms
- 661-780: Prime, resulting in average rates and terms
- 601-660: Near prime, resulting in worse-than-average interest rates
- 300-600: Subprime, which means you may not be approved for loans or credit and would not qualify for favorable terms
The average FICO credit score in the US in 2023 was about 715.
While having a good credit score is great, it doesn’t guarantee approval for loans or credit cards. These numbers serve as a benchmark of past financial behavior. Higher numbers mean you’ve been more responsible and, therefore, could give banks and lenders more confidence in doing business with you. But other factors also apply.
How are credit scores calculated?
If you’ve ever applied for a credit card, tried to rent an apartment, or looked into getting a loan, you’ve dealt with credit scores.
You’ll start generating credit when you open your first credit card, but it’s important to know how to build credit to start off on the right foot. Here are the factors that determine your credit score.
FICO Score
The FICO score, named after its developer, Fair Isaac Corporation, is the longest-running credit score issuer. It was invented in 1956 and became the standard for consumer lending in 1989. To obtain a FICO score, you must have had one credit account open for at least six months.
FICO uses the following factors to calculate your credit score, listed in order of importance:
- Payment history (35% of your credit score): Do you make your payments on time?
- Amounts owed (30% of your credit score): What is the ratio of your debt to your credit limit (i.e., your total credit debt divided by your total available credit)?
- Length of credit history (15% of your credit score): How long have you been managing credit?
- New credit (10% of your credit score): How often do you apply for new credits?
- Credit mix (10% of your credit score): How many different types of credit do you have, and how do you handle each?
VantageScore
VantageScore is a relative newcomer to the scene, debuting in 2006. It was introduced by the three major credit bureaus—Equifax, Experian, and TransUnion—to better account for changes in technology and borrower behavior.
VantageScore uses the following factors to determine your score:
- Payment history (40% of your score)
- Age and type of credit (21% of your score)
- Percentage of credit limit used (20% of your score)
- Balances (11% of your score)
- Recent credit (5% of your score)
- Available credit (3% of your score)
Why you have more than one credit score
You have more than one credit score primarily because of the different scoring models and versions in use. There are the two main credit score issuers—FICO and VantageScore. And each of those produces multiple score versions.
Also, the three major credit bureaus (Equifax, Experian, and TransUnion) that house your credit reports have information that varies slightly. That can lead to different scores even when using the same model.
Additionally, some lenders use industry-specific versions of credit scores to assess credit applications. For example, if you’re applying for a car loan, the finance person at the dealership may pull a credit score optimized for auto lending.
Why your credit score changes
Credit scores change based on your financial behavior. In line with the FICO and VantageScore scoring criteria outlined earlier in this piece, this includes things like:
- The loans and credit cards you apply for
- The bills you pay (and whether you pay them on time)
- How much of your available credit you use
If you routinely make credit card payments late, your credit score will typically fall. Lenders will want to see you consistently make on-time payments before any positive change. Responsible behaviors, such as paying off debts and correcting errors on your report, will cause your score to go up.
How to improve your credit score
The good news is that you, as consumers, have the power to improve your credit score. Let’s explore some of the ways to raise your score.
Keep your credit card balances low
Credit card companies factor your credit utilization rate (CUR) into your overall credit score. This is the ratio of how much credit you’re using vs. the total amount of credit you have available to you. For example, if your total credit limit is $10,000 and you’re carrying a $1,000 balance, you’d have a 10% credit utilization rate.
Keeping this number low keeps your credit score up. While there’s no exact number that helps your credit, most experts say it’s a good idea to keep this number under 30%.
Pay your bills on time
Paying your bills on time is as important, if not more important, than whether you pay them in full. Late credit card, loan, and bill payments translate to financial irresponsibility in a lender’s eyes. This can significantly damage your credit score. While holding a credit card balance may hurt your credit score, late payments actually cause more damage.
Keep unused credit cards open
Before you say goodbye to a credit card for good, think about how closing that card may impact your score. It’s not always beneficial to close credit card accounts.
Remember how your credit utilization ratio is a scoring factor? Closing a credit card will actually lower your available credit-to-used credit ratio. Additionally, history is good when it comes to credit. Creditors want to know you’ve been in the financial management game for a while. Closing an account can shorten the average age of your accounts, which affects your score.
Note that you shouldn’t open credit cards solely to increase your available credit and improve your CUR. This practice is an immediate red flag to creditors. Keep an eye on your total number of accounts.
Minimize hard inquiries
Hard inquiries occur when a lender or creditor checks your credit report to make a lending decision, such as when you apply for a credit card, mortgage, or auto loan.
Each hard inquiry can temporarily lower your score by a few points. While a single hard inquiry might have a negligible impact, multiple inquiries within a short period can signal to lenders that you’re in financial distress or taking on too much new debt, which can be risky. This can make it more challenging to secure favorable loan terms or even get approved for new credit.
Boosting your credit score can improve your financial health
Understanding credit scores and how they’re calculated can help you paint an overall picture of your financial health. Once you realize how your score fits into your overall personal finances, you can prioritize taking action. Credit Karma is an excellent tool to use in partnership with building your credit. Intuit also offers more financial literacy resources online, including a self-paced financial curriculum to help you become an expert in your own finances.