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Credit Score

Key Takeaways:

  • A credit score is a number between 300 – 850.
  • The three major credit bureaus are Experian, Equifax, and TransUnion.
  • A credit report reflects your credit history over the last 7 – 10 years.

What Is a Credit Score?

A credit score is a number between 300 and 850 that shows your creditworthiness, taking a range of factors into account.

Credit scores range between 300 and 850. The higher the number, the more financially dependable that individual is.

FICO or Fair Issac credit scores are what 90% of American businesses use to calculate and qualify to lend.

Scores below 620 are considered sub-optimal, and above 670 are deemed to be good. If an individual has a credit score of 800, that is regarded as excellent, and their creditworthiness is optimal.

When you apply for credit, your FICO score is taken into account, along with other factors such as income, length of employment, and the type of loan requested.

Your creditworthiness determines how likely you are to repay your debt.

Lenders will use your credit score and history to determine whether to approve your loan application, or not, and how much interest to charge.

5 Factors Of Credit Scores

1. Payment History – 35%

Payment history is taken into consideration. How long an account has been open, and how regularly it has been paid will affect the calculation.

If there are any adverse delinquencies such as bankruptcy or liens, they will stay on a credit report for seven years.

2. Debts Owed – 30%

The debts owed factor is 30% of the calculation. It takes into consideration how many debts are owed and to what value each debt is comprised of.

It also takes into account a credit utilization ratio, which refers to how much credit is available to a person compared to how much credit they have used.

If an individual has $20,000 available to them through credit cards and small loans but has only spent $8,000 worth of that credit, that would indicate low utilization and therefore improve their creditworthiness.

3. Credit History - 15%

Holding a credit account or loan for an extended time will improve a credit score. Mortgages and long-term credit cards (that are not maxed out) improve a person's credit score.

As the longer an individual is paying it off on time, it proves to lenders that they are reliable borrowers.

4. Credit Mix – 10%

This seems like an odd factor for consideration; however, 10% of a FICO credit score is based on the diversification of borrowing.

Having a mortgage, auto loan, personal loan, and credit cards can contribute to a higher credit score.

Debt consolidation can sometimes drop a credit score temporarily.

But keeping a mix of longer-term loans such as mortgages and not maxed out credit cards will raise a person's credit score over time.

5. New Credit – 10%

If a credit score report shows multiple new credit inquiries, a lender will consider that person a high-risk borrower. The calculation is based on how many new inquires there are and how many accounts have been opened.

Opening up multiple new accounts in a short period will reduce a credit score.

It is considered an indication that an individual is not managing their money correctly and will not be as reliable to repay their debt.

Your credit score usually refers to your FICO score but lenders may use other credit scoring systems as well.

Although each company's credit scoring model varies, generally speaking, a high score is anything above a 700. With a score this high, you have a high chance of the lender approving you and offering strong rates.

Banks use software to handle this part of the process because manually going through every applicant’s credit report is time-consuming.

These computer systems automatically look for patterns and red flags, such as outstanding debts, to create their credit score.

The Three Major Credit Bureaus

These credit reporting agencies are like information warehouses, storing data from lenders you have previously worked with, and other public records.

These agencies distribute your information to lenders when you apply for a loan.

The three main credit bureaus are:

Experian

The Experian credit score range is between 300 and 850. There is a PLUS score, but it's only meant for consumers and falls on a scale of 330 to 830.

Equifax

The Equifax credit score range is between 300 and 850.

TransUnion

Many financial institutions use TransUnion to manage customers' existing accounts. It has a score range of 300 to 850.

Note: It is important for the ratings on these bureaus to be accurate to avoid issues like loan application rejections and inaccuracies when applying for a job.

Credit Score vs Credit Report

A credit report is a document that lays out your credit history over the past 7 - 10 years.

It displays your identity, employment history, any inquiries into your credit, your payment history, any repossessions or foreclosures, and records of bankruptcy.

It does not, however, show personal details such as your medical history, race, bank account, or marital status. All three of the above credit reporting agencies offer credit reports, and each may vary slightly.

Your credit score is the three-digit number lenders use to determine your initial eligibility for a loan or credit card.

After getting this score, some lenders may approve you on the spot, but most larger loans, like a mortgage or a car loan, may require further underwriting to determine eligibility.

Importance of Credit to Consumers

There are various high-cost purchases that average earners couldn't make without credit.

If you needed to buy a house or car and have a favorable credit history, you can get a loan for that purchase and spread out the payments over many years.

Buying expensive things in installments is not just a matter of personal fulfillment, but it actually results in a better standard of living.

An auto loan makes it possible for safer and more reliable means of transportation over long distances.

A mortgage enables a homeowner to manage their living environment and even build equity in their home if the home's value appreciates in the coming years.

Credit Score FAQs

How do I check my credit score?

So, what is my credit score? You can check your credit score with the major credit bureaus:

You can also check your FICO score now. 

Why did my credit score drop?

Why is my credit score down? Your credit score can drop for many reasons, including a late or missed payment, a change to your credit limit, or when you apply for credit.

Late or missing payments have the biggest influence on your FICO score as it amounts for 35% of your total score. Credit issuers report payments that are 30 days late or more, and if you have payments that are more than 60 or 90 days late, it can have an even greater influence on your score.

If you've recently applied for a credit card, mortgage, or personal loan, your credit score can also be affected. Although most lenders do a soft credit check with prequalification, a full credit assessment typically involves a hard credit check and this can temporarily reduce your credit score.

Why is my credit score low after getting a credit card?

Depending on your credit card limit, maxing out your credit card or making a very large purchase can result in a quick drop in your credit score. This is referred to as your credit utilization ratio and it is the second most important factor in your FICO credit score.

Example: You have a credit limit of $10,000 and you carry a balance of $4,000. This means your credit utilization ratio is 40%. If your limit gets reduced to $8,000, you still have a balance of $4,000, but your ratio now stands at 50%. This has a negative influence on your credit score.

What situations result in good or bad credit scores?

A good rating is mostly determined if you have made timely payments and have limited debt. A person with a bad rating often has many debts, past late payments, and has borrowed more money than they can afford to pay back.

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    Last Updated: April 15, 2022

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