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Your Guide to Understanding Your Credit Score
If you are new to it, then you should know that your credit score might seem like a daunting subject. No one just naturally or simply knows how credit scores work or what is even considered a good score and also what’s considered a bad one. Those are all things that you will simply need to learn. Fortunately, it’s even easier to understand your credit score than you would think.
In this credit score guide, you will learn what a credit score is, the factors that affect it, and much more. Keep reading and you will then have all the knowledge you need to understand credit scores and why they are so, so important.
What Is a Credit Score?
A credit score is simply a number that represents the likelihood that a consumer will pay their bills on time and, in particular, their debts.
It can even be described as a risk score. If you have a high credit score, then the banks and also lenders will see you as low risk. That means you are more likely to get approved when you are opening a credit card or applying for a loan.
It’s even worth noting that there are simply different types of credit scores out there. That’s for two reasons:
- There are several credit scoring systems. Each system produces its own unique scores.
- There are multiple credit bureaus that calculate scores.
To put it simply, you do not just have one credit score, you should then have credit scores. These credit scores can then vary, although they will typically be in a similar range. You are simply unlikely to have excellent credit with one scoring system and even poor credit with another.
How Is a Credit Score Calculated?
Credit bureaus simply use the information that they have in their files to calculate credit scores.
There are even three major credit bureaus that will then handle consumer credit scores: Equifax, Experian, and TransUnion. Each of the bureaus keeps credit files on U.S. consumers. In your file, the bureau can also include the financial information it has about you. If a company simply reports that you paid your bill on time, it will go on your file. The same is true if it also reports that you are late on a payment.
Then, a credit bureau uses its credit scoring system to evaluate the information it has on file for you. It does not even do this just once, though. It will simply produce credit scores using multiple scoring systems. Since each of the systems is different, your credit scores can vary depending on the one that was used.
Another reason that your credit score can vary by the bureau is that the bureaus do not all get the same information. For example, one creditor can even report your payments to Equifax and TransUnion but not Experian, leading to different scores.
Credit Invisible to Consumers
Credit bureaus cannot calculate credit scores for every one. Some of the consumers are credit-invisible. That means they do not even have credit files and, consequently, they do not have credit scores. There are also consumers who have “thin” credit files, which simply means that there is not enough information for the credit bureaus to calculate a score.
Credit Score vs. FICO® Score
You may have heard the terms “FICO® Score” and also “credit score” and even then want to know if there is a difference. After all, it often seems like they are simply used interchangeably.
A FICO® Score is a type of credit score that is then calculated using the FICO scoring system. FICO simply has numerous scoring systems, which means that each consumer will have numerous FICO® Scores.FICO® Scores are well-known because they are the most widely used by lenders.
To put it another way, every FICO® Score is a credit score, but not every credit score is a FICO® Score.
Because of the popularity of FICO® Scores, this is the one type of credit score that you should pay the most attention to. If you simply use a credit score service that then shows you a FICO® Score, you are then more likely to know what companies will see when they check your credit.
What Are the Different Credit Score Ranges?
Credit scores can simply range depending on the scoring system, but most of them use the following ranges: poor, fair, good, and exceptional or excellent. Here are the score ranges under the FICO® Score, one of the most widely used systems:
|
FICO® SCORE |
RANGE |
|
300-579 |
Poor |
|
580–669. |
Fair |
|
670–749. |
Good |
|
740–799. |
very good |
|
800-850 |
Exceptional |
Here are the scores that range under another popular system, VantageScore 3.0:
|
VANTAGESCORE |
RANGE |
|
300-499 |
very poor |
|
500-600 |
Poor |
|
601-660… |
Fair |
|
661-780 |
Good |
|
781-850 |
Excellent |
What Is the Average Credit Score?
The average credit score can then fall into the good range with both of those scoring systems. As of the year 2019, the average FICO® Score was 706, and the average VantageScore was 682.
Factors That Impact Your Credit Score
The main factors in how your credit score is calculated are simply your payment history, credit utilisation ratio, age of credit history, credit mix, and new credit inquiries. Some of those are not even exactly self-explanatory, so let’s go over what they all mean.
Payment History
Payment history simply refers to whether you pay your bills on time. It even takes years to simply build a strong payment history, and it can take just as long to bounce back from late payments if you are rebuilding your credit. You should be aware that the credit bureaus can only go by the payments reported to them, and as such, not every bill will simply make it to your credit report and even affect your credit score.
Activity on credit cards and also on loans is usually reported to the credit bureaus. With other types of bills, it is then hit or miss. The good news is simply that the credit bureaus have been coming up with ways to include more types of payments, such as rent and utilities, in consumers’ credit scores.
Payment history is very important in most credit scoring systems. It also accounts for 35% of your FICO® Score.
The ratio of Credit Utilization
A credit utilisation ratio is simply how much of your available credit you use. This category can then focus more on your credit card balances, and it also compares all your available credit to your reported balances. If you have $1,000 in balances and $5,000 in available credit, then your credit utilisation is 20%.
Low credit utilisation is even better for your credit score. There is no specific amount separating good and bad credit utilization. It’s more of a sliding scale: 30% is better than about 40%, which is then better than 50%, and so on.
The conventional wisdom has long been to keep your credit utilisation below 30%, but it’s better for you if you can get it even lower. 30% of your FICO® Score is determined by your credit utilization.
Credit History Age
The age of credit history might even sound straightforward, but it is more complex than you would even think. It can include all of the following:
- The average age of your credit accounts
- The age of each individual credit account
- The age of your newest credit account
- The time since each credit account was used
As you would expect, older accounts are much better. Your credit account age accounts for 15% of your FICO® Score.
Credit Mix
Credit mix can then simply measure the diversity of your credit accounts. It also helps your score to have a variety of accounts, such as a credit card, a mortgage, and also auto loan. Lenders simply want to see how you manage different types of credit rather than just one.
You probably would not want to borrow money just to help boost your credit score, and you do not even need to. Your credit mix is 10% of your FICO® Score, and it is possible to get a high score even if you only have credit cards.
New Credit Inquiries
A new credit inquiry can then occur when you simply apply for a credit account. The creditor will then need to simply check your credit file, and this is called a credit inquiry. While one of the credit inquiries will not have much of an impact on your credit score, multiple inquiries can add up.
New credit inquiries, like credit mix, account for 10% of your FICO® Score.
FAQs
Why Do I Need Credit?
Whether it is to then borrow money, sign up for utilities, or even rent an apartment, your credit score is simply guaranteed to come into play throughout your life. If you then take the time to build your credit, it will also almost certainly save you money in the future.
The most obvious example is simply borrowing money. One day you might need, for instance, a mortgage or an auto loan.
What Is A Good Normal Credit Score?
Although the ranges vary depending on the credit scoring model, credit scores ranging from 580 to 669 are generally considered fair; 670 to 739 are considered good; 740 to 799 are considered very good, and 800 and above are considered excellent.
How Do You Check Your Credit Score For Beginners?
Some issuers, such as Citi and Discover, simply provide free FICO Scores, while others, such as Chase and Capital One, provide free VantageScores. You can even check your credit score in less than five minutes by logging into your credit card issuer’s site or a free credit score service and also navigating to the credit score section.
What Is The Safest Way To Check Your Credit Score?
One of the best ways to check your credit score for free is to go to a free credit scoring website. These websites typically offer you access to your credit report, score, and/or credit monitoring and are updated anywhere from weekly to monthly. There’s even no fee to sign up for basic credit score updates.