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A credit score is a three-digit number that can determine whether you get approved for a credit card or loan, or even get a cellphone or apartment.
Banks and lenders refer to your credit score to determine how fiscally responsible you are, so it’s important to understand what a credit score is, how it’s created and how to build up a great credit score. We’ll walk you through how your credit score works, what a good credit score is, and what can hurt your score.
- What is a credit score?
- What is your credit score based on?
- What is a good credit score?
- What actions can hurt your credit score?
- What credit score do you need to buy a house or a car?
Your credit score is derived from your credit history: this includes information such as when you’ve applied for credit cards and loans, whether you’ve ever been late with a payment or had a debt go to collections and more. The credit scoring companies take that information and distill it into a number that tells potential lenders how reliable you are.
What is a credit score?
At its most basic, a credit score ranges from 300 to 850. The lower the number, the riskier you are to lenders. There are three primary credit bureaus: Experian, Equifax and TransUnion, which all compile your credit history, which is fed into an algorithm to determine your credit score. According to 2019 Experian data, the average FICO score in the U.S. is 703.
Your credit score tells potential lenders how reliable of a borrower you are — or in other words, what the risk is that you’ll fail to pay back your debt. While it affects how likely you are to get approved for products such as credit cards, auto loans, mortgages and more, it also can play into what your interest rate will be if approved for one of these products.
What is a FICO Score?
“FICO” is the name of the company that generates the FICO Score, the most frequently used scoring model. The name comes from Fair Isaac Corporation, the company that developed this scoring model. There are different versions of the FICO Score, but the most widely used is the FICO Score 8, which ranges from 300 to 850.
What is a VantageScore?
VantageScore is another scoring method that competes with the FICO Score. Lenders, including Chase and Capital One, offer cardholders free access to this score. If your issuer uses the VantageScore 3.0 or VantageScore 4.0 models, your score will also range from 300 to 850. However, if you’re new to credit, you may have a VantageScore before you have a FICO Score. FICO won’t generate a score for you until you have an account that’s at least six months old, while VantageScore only requires that you have an account that’s at least one month old.
What is your credit score based on?
There are five factors that play into how your FICO Score is determined. Here’s how much weight each factor carries:
- Payment history (35%): The most important thing you can do for your credit score is to pay on time every time. Set up autopay if keeping track of payments poses a problem.
- Amounts owed (30%): The rule of thumb is that you should keep the amount you owe, also known as your utilization, to 30% or less of your available credit. For example, if you have a $5,000 credit limit on your credit card, don’t use more than $1,500 of that at one time.
- Length of credit history (15%): This includes both the age of your newest account and the age of your oldest account, as well as the average age of all your accounts.
- Credit mix (10%): It’s better for your score when you have a mix of credit types, such as credit cards and installment loans.
- New credit (10%): Opening up new accounts too rapidly can make you look risky to lenders, so be judicious about when you apply for new cards and loans.
Your VantageScore is also influenced by five factors. Here’s what they are and how the VantageScore 4.0 model weights them:
- Total credit usage, balance and available credit (extremely influential to your score).
- Credit mix and experience (highly influential to your score).
- Payment history (moderately influential to your score).
- Age of credit history (less influential to your score).
- New accounts (less influential to your score).
It’s important to note that even though payment history is classified as “moderately influential” to your VantageScore, VantageScore still stresses the importance of paying all bills on time.
What is a good credit score?
Here are the ranges your credit score can fall into, according to FICO:
- Exceptional: 800 to 850
- Very good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
If your score is anywhere from good to exceptional, that will increase your chances of getting approved for credit cards with good rewards and benefits, and will also improve your chances of getting lower interest rates on credit cards and loans.
If you’re wondering what a bad credit score is, it’s one in the poor credit range — 300 to 579.
What actions can hurt your credit score?
Two of the worst things you can do to damage your credit score are:
- Paying late. Not only will making late payments tank your credit score, but many cards will charge you a late fee and increase your interest rate to a high penalty APR.
- Maxing out your credit card. It’s best not to charge up your card to your credit limit. If you need to make a big purchase, options include requesting a credit limit increase or applying for a new card that offers 0% intro APR on purchases. Or, you can make multiple payments during the month to bring your balance down quickly.
Other factors that can hurt your score include not having had a credit card or loan for a long time, not having a variety of account types (for example, if you have a credit card but no loans) and applying for a lot of new credit, thus putting hard inquiries on your credit reports.
One thing that won’t hurt your credit score is checking it yourself, and there are plenty of free ways to check your score — you can sign up for a LendingTree account to get your free credit score. In addition, Discover offers a free FICO Score through its Discover Credit Scorecard, while Capital One offers a free VantageScore through CreditWise.
You can also get one free copy per year of your credit report from each of the three big bureaus — Equifax, Experian, and TransUnion — by visiting AnnualCreditReport.com.
What credit score do you need to buy a house or a car?
There’s no magic number that will get you approved for a mortgage or an auto loan. However, if you have good or excellent credit, you can likely expect a better chance of approval and lower interest rates than someone with poor or fair credit.
It’s worth noting that a credit score of 580 to 619 is considered subprime, while a credit score that’s less than 580 is deep subprime. If you fall into the subprime or deep subprime categories, you’re less likely to be approved for a mortgage or car loans — and if you are approved, you can likely expect expensive interest rates.
If you have a poor credit score, don’t fall into the trap of trying to pay someone to fix it — that won’t work. You can’t remove legitimate marks, such as late payments, from your credit reports, but you can dispute erroneous information, such as accounts opened fraudulently in your name. But know that with good credit behavior over time, your score can improve. A useful tool to rebuild bad credit is a secured credit card, which requires a deposit that serves as your credit line.
It’s also worth noting that there are a variety of credit scores, which different lenders use for different purposes. Checking your score before buying a house or a car is smart, but it’s good to recognize the score you’re looking at might not be exactly the same as the one a lender sees.