Credit scores are an essential part of personal finance, impacting everything from loan approvals to interest rates. Understanding the different types of credit scores and how they are calculated can help you make better financial decisions. This guide will provide an overview of credit scores, their importance, and what factors influence them.
What Is A Credit Score?
A credit score is a number that represents your creditworthiness to lenders. This three-digit score helps financial institutions decide whether to lend you money and at what interest rate.
Your score is calculated based on your credit history, which includes information like your payment history, the amount of debt you carry, and the length of your credit history. Lenders use this score to assess the risk of lending to you. A higher score typically indicates a lower risk, making it easier to get approved for loans and credit cards with favorable terms.
There are several types of credit scores, but the two most common are the FICO Score and the VantageScore. While they both aim to predict your credit risk, they use slightly different models and formulas. Knowing the differences between them can help you better understand your financial standing.
FICO Score
The FICO Score is the credit score lenders use most widely. The Fair Isaac Corporation created it and is used in over 90% of lending decisions in the United States.
How FICO Scores Are Calculated
FICO calculates your score using five main factors from your credit report. Payment history is the most significant factor, making up 35% of your score. Amounts owed, or your credit utilization, accounts for 30%. The length of your credit history contributes 15%, while new credit and credit mix each make up 10%.
Factors That Affect FICO Scores
Your payment history reflects whether you have paid your past credit accounts on time. Late payments, bankruptcies, and collections can negatively impact this part of your score. The amounts owed category looks at how much you owe across all your accounts, particularly how much of your available credit you are using.
The length of your credit history considers the age of your oldest account, your newest account, and the average age of all your accounts. New credit examines how many new accounts you have opened recently. Applying for several credit accounts in a short period can lower your score. Finally, credit mix looks at the different types of credit you have, such as credit cards, mortgages, and personal loans.
What Is a Good FICO Score?
FICO scores range from 300 to 850. A score of 800 or above is considered exceptional. A score between 740 and 799 is very good, and a score from 670 to 739 is considered good. Scores between 580 and 669 are fair, while anything below 580 is poor.
VantageScore
VantageScore was created as a joint venture by the three major credit bureaus: Equifax, Experian, and TransUnion. It was designed to provide a more consistent and predictive credit scoring model for lenders.
How VantageScores Are Calculated
VantageScore also uses information from your credit reports to calculate your score. Its model emphasizes different factors and their influence. Payment history is the most influential factor. Credit utilization and your total credit balance are also highly influential.
Factors That Affect VantageScores
Like FICO, your payment history is crucial for your VantageScore. Timely payments will help your score, while late payments will hurt it. Credit utilization, which is the percentage of your available credit that you’re using, is also very important. Keeping this percentage low is beneficial.
The depth of your credit experience, which includes the age of your credit accounts, and your recent credit behavior, such as opening new accounts, are moderately influential. The available credit you have also influences the calculation.
What Is a Good VantageScore?
VantageScore uses the same 300 to 850 range as FICO. A score of 781 to 850 is considered excellent. A score between 661 and 780 is good. Scores from 601 to 660 are fair, and scores from 300 to 600 are considered poor or very poor.
Other Credit Scores
Besides FICO and VantageScore, lenders sometimes use custom, industry-specific scores. For example, auto lenders and credit card issuers might use scores tailored to predict risk for their specific products. These scores are often based on the FICO model but are adjusted for the industry.
There are also educational credit scores, which lenders don’t use but can help you track your credit health. Services like Credit Karma provide these scores to help consumers understand their financial situation without impacting their official scores.
How to Improve Your Credit Score
Improving your credit score takes time and consistent effort. One of the most effective methods is to make all your payments on time, every time. Since payment history is the biggest factor in most scoring models, this is a critical step.
Another important strategy is to pay down your credit card balances to lower your credit utilization ratio. Aim to use less than 30% of your available credit. You should also avoid opening too many new accounts in a short period, as this can lead to multiple hard inquiries on your credit report.
Taking out a personal loan and making timely payments can also help boost your credit score. This demonstrates to lenders that you can manage debt responsibly and adds to your credit mix. A personal loan can diversify your credit history, which is a positive factor for your score.
You can check your credit score for free from various sources. Many credit card companies and banks offer free access to your FICO or VantageScore. You are also entitled to a free credit report from each of the three major credit bureaus annually through AnnualCreditReport.com.
If you are in Texas and considering a personal loan, City Finance can provide options that may help you build your credit. We are a loan company in Texas providing personal loans and support for those who want to boost their credit. Our team can offer more information on how a personal loan can impact your credit score.
Understanding Credit Is Key to Financial Health
Understanding the different types of credit scores is essential for managing your finances. Whether it’s a FICO Score or a VantageScore, knowing what goes into these numbers empowers you to take control of your credit.
By focusing on timely payments, low credit utilization, and responsible credit management, you can build a strong credit profile that opens doors to better financial opportunities. And visit City Finance today to learn more about how paying back a loan can help build your credit score.
