What Is a Credit Score?

What Is a Credit Score?

Credit scores typically fall within a range of 300 to 850. “Good” scores are considered to be around 670 or higher, according to credit score provider FICO. You have a better chance of being approved for loans at more favorable terms when you have a higher score.

Most credit scores are generated by two major companies: FICO, which stands for Fair Isaac Corporation, and VantageScore Solutions.

FICO scores are based on the Fair Isaac Corporation’s scoring model. VantageScore Solutions is an independent company that owns the intellectual property rights to VantageScore. This scoring model was jointly developed by the three major credit bureaus—Experian, TransUnion, and Equifax—and they retain partial ownership of VantageScore Solutions.

How Credit Scores Work

FICO and VantageScore’s scoring models enable them to generate individual credit scores using an automated process. Reading through someone’s entire credit report takes significant time, and lenders would have to spend resources doing so for every applicant if they didn’t have access to credit scores.

Someone looking at your application might also miss important details in your credit report or make errors in judgment regarding the severity of some information. Credit scores provide a far simpler way for potential lenders to determine creditworthiness.

Scores arrived at usually vary somewhat depending on which credit bureau supplies the information. Each credit reporting agency can have slightly different data, and they’re not required to share most information with each other. This can result in a higher or lower score, depending on the source material fed into the scoring model. 

Types of Credit Scores

Different types of scores can exist for various lending purposes. For example, FICO offers specialized scores for financing a vehicle, obtaining a mortgage, and qualifying for a credit card.

Both FICO and VantageScore are constantly refining their models, and the exact model used can have an effect on your score. FICO Score 9 is the latest version of the FICO model, although FICO Score 8 is still used more frequently. The latest version of VantageScore is VantageScore 4.0.

How To Improve Your Credit Score

FICO and VantageScore might not share the exact details of how their models work, but they do provide guidance on which factors matter the most. Always strive to make your loan payments on time, because your payment history is the most important factor in your credit score under both major models.

Credit scores are designed to predict if you’ll make payments on time, so it’s no surprise that late payments in your credit history will bring down your credit scores.

The less you owe, the less risky you are as a borrower. Your credit utilization ratio measures how much of your available credit you’re currently using. Credit scoring models penalize you if you’re using a high proportion of the credit lines that are available to you.

Lenders are likely to believe that you’ll continue this type of behavior if you have a long track record of successful borrowing and repaying. The length of your credit history is based on a number of factors, including the ages of your oldest and newest accounts and the average age of all your accounts.

It can be worth it to keep a credit card active by making a small purchase every month or so, such as a tank of gas, as long as having it available doesn’t tempt you to rack up debt and the card doesn’t have an annual fee.

Scoring models consider what types of loans you’re using or have used in the past, including credit cards, auto loans, and home loans. Lenders like to see that you can handle a mix of different types of loans, so consider diversifying if you can safely do so.

Opening several new credit accounts in a relatively short period of time can signal that you're facing financial difficulties and are a riskier borrower. The fewer recent credit inquiries you have, the better.

How Can I Check My Credit Score?

It’s easy to review your credit scores, although you might have to pay a fee.

You might be able to get your credit scores from other sources as well:

• Credit card issuers sometimes provide free credit scores to their customers. Ask your current credit card companies whether they offer them.
• You can ask the lender about your score during the application process when you apply for a loan.
• VantageScore maintains a list of partner sites that sometimes offer free access to your score.
• You can purchase FICO credit scores on the FICO website.

Your credit score depends on the information in your credit report, so your report might actually be more important. Get your credit reports from each reporting agency, review the information, and fix any errors to be sure that your score accurately reflects your borrowing history.