We usually think of credit scores when it’s time to get a mortgage, secure a car loan or apply for a credit card, but your score can affect you in other ways. It can determine your ability to rent an apartment or get a cell phone plan.
And it might seem old school, but some companies still run credit checks on prospective employees, regardless of the industry they’re in.
So, yes: You want that slightly mysterious three-digit number to be a good one.
And hey, with some credit monitoring and best practices, you can earn a perfect 850 credit score. (You’d join an exclusive club with only 1% of Americans.)
Let’s take a look at credit scores ranges and how you can improve your score.
What Is a Credit Score?
A credit score is a three-digit number that lets potential lenders know your risk level when you borrow money. A low score will make it more difficult to secure a loan, credit card or decent interest rate. A high score will help you qualify for financing and better interest rates.
Your score is calculated using information compiled by credit bureaus, aka consumer reporting agencies. For example, say you borrowed money via a loan. The loan, along with whether you paid it back, would be included on your credit report.
There are three major credit bureaus in the United States: Experian, Equifax and TransUnion.
The bureaus keep tabs on your credit history and then assign you your credit score. Creditors — such as mortgage lenders, banks and credit card companies — use this data to make lending decisions.
Some creditors (think, smaller lenders) don’t report your account information to credit bureaus, and they’re not legally required to do so. However, almost every major creditor does report to all three.
The credit bureaus don’t share information with one another, so your report with each bureau may vary a bit.
In addition to credit card and loan account records, basic information — your name, address and recent applications — is noted. However, your income, race, gender, age, religion and/or health information are NOT included.
There are two basic models of credit scores: FICO scores and VantageScores.
But before we go any further, let’s clear something up: You can have MANY different credit scores. FICO and VantageScore are just two (important!) brands.
The main models have multiple versions, lenders have their own scoring methods, and credit bureaus collect different data and don’t update your reports simultaneously.
What Is a FICO Score?
FICO, formerly known as Fair Isaac Corp., was founded in 1956. The company introduced credit scoring — aka the FICO score — that made credit more widely available around the world.
FICO scores are considered an industry standard and are used in over 90% of U.S. lending decisions. Its modern scoring model was introduced in 1989 and has been updated over the years. FICO Score 8 is the most commonly used version.
How Your FICO Score Is Calculated
FICO scores are calculated using five credit factors:
- Payment history, 35%: Whether you’ve paid your bills on time.
- Credit utilization, 30%: How much you’re using of your total available credit.
- Length of credit history, 15%: The average age of all your accounts, including how long it’s been since you used those accounts.
- How often you’ve opened new accounts, 10%: Opening many new accounts at once can ding your score
- Mix of credit, 10%: Lenders like to see a variety of credit, e.g., credit cards and loans, to determine whether you can manage different types of accounts.
What Is Considered a Good FICO Score?
FICO credit scores range from 300 to 850. Experts and lenders don’t always agree on what is a “good” score, but here’s a typical breakdown:
- 740-850: Excellent
- 680-740: Good
- 620-680: Acceptable
- 550-620: Subprime
- 300-550: Poor
The average FICO score was 704 in 2018.
What Is a VantageScore?
The VantageScore model was developed by Equifax, Experian and TransUnion, and introduced in 2006.
Unlike a FICO score — which requires you to have six months of credit history — you can get a VantageScore with just one month of credit history.
How Your VantageScore Is Calculated
VantageScore 3.0 was released in 2013. Here is how each factor is weighted:
- 40% payment history
- 21% depth of credit
- 20% utilization
- 11% balances
- 5% recent credit
- 3% available credit
The “depth of credit” grouping is the length of your credit history plus the different types of credit used, which FICO calls “credit mix.”
VantageScore 4.0 is the latest model. It uses machine learning techniques and groups the categories slightly differently. VantageScore.com doesn’t break down each area by percentages, but rather “influence:”
- Extremely influential: Total credit usage, balance and available credit
- Highly influential: Credit mix and experience
- Moderately influential: Payment history
- Less influential: Age of credit and new accounts
What Is Considered a Good VantageScore?
VantageScore has two credit scoring models: If the score was generated using the VantageScore 3.0 model or higher, it will range from 300-850. If it was generated with an earlier model, the score will range from 501-990
The latter model with a range from 300 to 850 is more commonly used by other credit scoring models. As with FICO scores, a higher score indicates a less risky borrower to lenders.
The following is a common breakdown of VantageScore ranges:
- 750-850: Excellent
- 700-749: Good
- 650-699: Fair
- 550-649: Poor
- 300-549: Very poor
The average VantageScore was 675 in 2017, according to Experian.
What Credit Score Do I Need to Make Big Purchases?
The higher your score, the more opportunities you will have to secure loans and better interest rates. Plain, but-maybe-not-so simple.
There’s no minimum credit score to buy a home, but here are the minimum requirements for some common types of mortgages. Note that many lenders have higher minimums.
- Conventional mortgage: 620
- FHA mortgage with 3.5% down payment: 580
- FHA mortgage with 10% down payment: 500
Beyond getting you approved for a loan, a good score can save you money in the long run. A borrower with a FICO score of 760 or higher could expect to pay $187 less a month — a savings of over $2,200 a year — for a $200,000, 30-year, fixed-rate mortgage than someone with a score of 620.
Comparatively, you’ll pay more toward a car loan with a poor score, too. There’s no minimum score across the board needed to secure one, as requirements vary by lender.
When determining if you’re creditworthy, lenders take an array of items into consideration. In addition to a consumer’s credit score, they also consider income, the type of credit or loan requested, and how long you’ve been at your job.
Small changes to your credit score don’t really matter. Here’s why.
How Can I Access My Credit Score?
The Fair Credit Reporting Act entitles you to a free credit report each year from the three primary credit bureaus. You can request your report every 12 months at AnnualCreditReport.com. However, these reports don’t include your credit scores.
To access your credit score, you can:
- Check your credit card statement: Many banks and credit card companies have begun providing credit scores in monthly statements or when you log into your account.
- Talk to a nonprofit credit or housing counselor: Some counselors can provide you with free credit reports and scores.
- Use an online credit score service: A number of free online services will give you your credit score and let you monitor your credit reports.
Also, checking your own credit report will NOT hurt your credit score. It’s considered a soft inquiry. Only hard inquiries, which show up when you apply for credit, affect your score.
How Can I Improve My Credit Score?
Remember earlier in the article when we addressed creditworthiness — payment history, utilization ratio, length of credit history, new accounts and mix of credit? Let’s revisit these categories.
To raise your score, you’ll want to:
- Pay your bills on time: Pay at least the minimum on time each month. If you have extra funds and can spare it, make additional payments.
- Keep your credit card balances low. Lenders prefer credit utilization ratios of 30% or less.
- Avoid closing accounts: Closing accounts can increase your utilization ratio and lower your length of credit, both of which will hurt your score. It might be worth keeping a relatively dormant credit card open, as long as it doesn’t charge an annual fee.
- Avoid opening too many new accounts in a short period of time: When you apply for a new account, it shows up as a hard inquiry, which can lower your credit score.
- Mix of credit: Have a healthy variety of credit types on your report — but do so responsibly. It isn’t worth taking out a loan just to diversify your credit mix.
You can also ask your credit card company to raise your credit limits and dispute any inaccuracies on your credit report to raise your score.
Maintaining a good credit score can seem like a juggling act at times, but it’s well worth it. Aside from being able to brag about your high score at parties (just me?), a great credit score can help you qualify for purchases and secure favorable rates, saving you more money — always a good thing!
Kathleen Garvin (@itskgarvin) is a writer and editor whose work has appeared in U.S. News, Clark.com and Well Kept Wallet.