Your credit score isn’t the only factor used in lending decisions, yet it carries significant weight. That’s why understanding how credit scores work and keeping yours as high as possible is important. This beginner’s guide will walk you through the basics.
When you apply for a credit card, a personal loan, or any other type of financing, lenders rely on your credit score. They’ll use it together with other sources of information to determine if they’ll lend you money and at what rate.
Having a good score can help improve your access to better credit terms and maximize your financial well-being.
What is a credit score?
A credit score is a three-digit number that gives an indication of credit worthiness—the higher the number the better. It implies a given probability that you’ll pay back a loan, according to a complex math model.
There are two types of companies involved in providing credit scores. These include the credit reporting agencies—or credit bureaus, and the credit scoring companies.
Credit scoring vs. credit reporting
Credit scoring companies develop, own and maintain the math models that calculate credit scores. FICO and VantageScore—companies you might have heard of, are engaged in credit scoring.
Credit reporting agencies, on the other hand, gather information and run the numbers. Experian, Equifax and TransUnion are the three largest agencies with operations in the U.S.
To generate the scores, they feed these models with the credit information they aggregate on you. They then sell these scores and credit information to lenders and other interested parties.
How many credit scores do you have?
It may surprise you to learn that you don’t have just one credit score; or two; or three. In fact, there isn’t such a thing as “the” credit score that applies to you all the time for every situation.
You actually have multiple credit scores because the source of the information used to calculate them isn’t always the same. In addition, the kind of financing you seek and the type lender providing you with the money will play a role in the credit score or scores that are used.
One way to simplify matters when thinking about your credit score is to focus on the most popular versions that lenders use. At present, these are FICO Score 8 and VantageScore 3.0. If you want to get a hold of your score, focus on FICO Score 8 as it’s the more popular of the two.
Additional facts about credit scores
Here’s some additional information to keep in mind about credit scores:
- Credit scores can range from 300 to 850. Both FICO and VantageScore use this range. While they’re not the only companies that generate scores, they’re the most popular ones. So, chances are that you’ll hear of them whenever you’re in the market for a financial product. Also, 300 to 850 is not the only scoring range out there. Other ranges may apply depending on the industry or scoring company used.
- Higher credit scores indicate a lower repayment risk to lenders. Higher scores can often qualify you to access cheaper credit. Therefore, aim to keep yours as high as possible.
- Credit scores are rated from bad to excellent, but, surprisingly, there isn’t a standard classification. Different lenders will use different cut-offs to rate a particular credit range as “excellent,” “good” or “average,” for example. A universal standard is not yet in use.
What’s a typical credit score?
The table below, based on FICO scores, provides information on different scoring ranges. It shows the approximate percentage of the US population that falls within each range.
|Rating||Range||Percent of US Population|
|Excellent||Higher than 750||40%|
|Good||670 - 749||22%|
|Average or Fair||600 - 669||18%|
|Bad||Lower than 600||20%|
The percentages above change over time and depend on various factors. These include economic conditions, credit behavior, modifications to credit scoring models, and other factors, so they’re never static.
It’s good news that credit scores are never static because that means you can improve your score over time by taking the right steps.
Is my credit score included in my credit report?
No, it isn’t. Your credit report is a document that provides information about your credit activity. It contains installment and revolving loan payment history and the status of your credit accounts.
This information is fed to a credit scoring model to produce a credit score. And while the credit bureaus use your credit report to calculate your credit scores, your credit score itself won’t be part of your credit report.
How to get your free credit score
Credit reporting agencies will be more than happy to sell you your credit score, but don’t open your wallet just yet. There are ways you can obtain your credit score for free.
If your lender doesn’t offer free credit scores, you can find other free alternatives:
» Free FICO Score 8: Discover offers a scorecard with your free FICO Score 8 even if you’re not a customer. They use credit information from Experian, so their score may differ from that of other credit bureaus. If you’ve placed a credit freeze on your file, your free score will be shown up to the time before the freeze. Discover refreshes the scores monthly or when you log in, whichever is longer.
» Free VantageScore 3.0: You don’t need to be a customer to get your free score from these sources:
- Capital One’s CreditWise free credit score. They use credit information from TransUnion.
- Chase’s CreditJourney free credit score. Their credit scores are powered by TransUnion and are refreshed weekly when you log into your account.
There’s little you can do to influence how credit scoring models work. But you can definitely shape the credit information that’s used to produce them and improve your score.
You can do this relatively quickly in some situations, and over time in some others. Quickly, for example, when you correct inaccuracies in your credit reports. And over time, for instance, when you generate and accumulate a better credit history, pay down debt or reduce your use of credit.
How do I get my credit report for free?
There’s no reason for you to spend money to get your credit reports. By federal law, you’re entitled to one free copy of your credit report every 12 months from each of the three nationwide credit reporting agencies.
These three reports will be slightly different from one another. The reason is that each credit bureau may obtain its information on you from different sources. As a result, your three credit reports won’t be identical.
There’s one authorized website
AnnualCreditReport.com is the authorized source under federal law for free credit reports. But since the credit bureaus themselves operate this website, watch out for other services they offer that aren’t free.
To get your free reports, you’ll need to fill out a form and provide your name, address, social security number, and date of birth to verify your identity. To keep your file secure, the credit reporting agency may ask you some questions that only you would be able to answer.
Also, each agency may ask you different questions as the information they have on you may come from different sources. You can obtain your free credit reports three ways:
- Online, by visiting www.AnnualCreditReport.com
- By phone, calling 1-877-322-8228
- Through mail, by completing the Annual Credit Report Request Form and mailing it to:
PO Box 105281
Atlanta, GA 30348-5281
Remember that obtaining your free credit reports:
- Won’t affect your credit score in any way.
- Allows you to correct any errors in your reports. Correcting errors is important to ensure the credit score derived from your reports is as high as it can be.
One last point to keep in mind is that you don’t have to get all 3 credit reports at the same time. You can request, say, your Experian report in January, your Equifax report in May and your TransUnion report in September. This way, you’ll be able to keep an eye on the accuracy of your information throughout the year.
What information do credit reporting agencies have?
All three of the main credit reporting agencies collect similar information on you, but it’s unlikely that all three of them will have the exact same files. That’s why your credit score with say, Experian, might be different from your score with TransUnion.
While they’ll have some differences depending on the credit agency, credit reports contain the same categories of information and include:
- Your personal information: name, current and previous addresses, date of birth, employment information, and social security number. While this information is in your credit report, it isn’t used by FICO scores.
- Your accounts: installment loans, revolving accounts, date opened, credit limit, amounts, balances and payment history.
- Inquiries: Requests for your credit report for the past 2 years.
- Negative items: Reported missed payments, collections and public record information obtained from federal, state and county courts that includes liens, foreclosures and bankruptcies.
Regarding inquiries, whenever a lender or other party gets access to your credit report, the credit reporting agencies record it. These inquiries are categorized as either soft or hard credit pulls.
Soft inquiries occur when you check your own credit or a lender checks your credit to pre-approve you for a loan. Soft inquiries won’t affect your credit score.
Hard inquiries occur when a third party or lender checks your credit in the context of an application for financing with them. Hard inquiries will impact your score.
What is FICO and VantageScore?
The companies that provide the most popular credit scoring models are FICO and VantageScore. FICO is a public company that develops scoring models and other related products. They introduced their first FICO score in 1989 and were originally known as Fair Isaac Corporation.
VantageScore also produces credit scoring models and competes with FICO as a credit score provider. VantageScore has been around since 2006, when the major credit reporting agencies joined forces to provide an alternative credit scoring offering to the market.
FICO and VantageScore offer multiple credit scores
The table below lays out which credit score is likely to be used for different lending situations:
|Credit cards||FICO Bankcard Score 2, 4, 5 or 8; FICO Score 3||VantageScore 3.0|
|Auto lending||FICO Auto Score 2, 4, 5 or 8||VantageScore 3.0|
|Mortgage lending||FICO Score 2, 4 or 5||VantageScore 4.0|
|Most widely used||FICO Score 8||VantageScore 3.0|
FICO offers multiple scores. Their FICO Score 8 above, for example, is used by credit card issuers and is the most popular version. FICO also has released its Score 9 version, which is in the process of gaining traction.
The latest addition to the FICO score family is the UltraFICO score. This score version factors in your loan payment behavior and bank account activity as additional indicators of your financial behavior.
Given the multiple offerings, we recommend that you focus your attention on the FICO Score 8 to monitor your credit score, as it’s their most popular version.
The VantageScore 3.0 model is used in the credit card and Auto lending markets, while the VantageScore 4.0 model is used in the mortgage industry. If you can get a VantageScore, you’ll want to focus on their 3.0 model.
What affects credit scores?
FICO scores use both the good and the not-so-good information contained in your credit reports. In general, the factors that affect credit scores, together with their relative weight, by category are:
We say “in general,” since the relative weight of each of these categories isn’t set in stone. They depend on each person’s credit history and other factors that FICO uses. Here’s a description of each category:
- Payment history, 35%: This considers your various accounts (store accounts, credit cards, loans, mortgages, etc.) and whether you have missed payments or listed collections. It also looks at public record items such as bankruptcies and foreclosures.
- Amounts owed, 30%: This includes the total amount of debt you owe, the number of accounts you have which carry a balance, and your credit utilization ratio. This ratio refers to how much of your available credit you’re currently using.
- Length of credit history, 15%: Refers to the age of your accounts, including how old is your oldest account.
- Credit mix in use, 10%: Refers to the types of accounts you have, whether store accounts, credit cards, loans, mortgages, etc.
- New credit, 10%: This category looks at the frequency with which you‘ve opened accounts in the past and the number of new credit requests you’ve made in the past year.
How do I improve my credit score?
This is such an important question, that we’ve dedicated a separate guide to this topic:
» Improve your credit: 19 Ways to Improve Your Credit Score.
In this guide you’ll find more details on:
- The key factors affecting your credit score
- 19 ways to improve it, and
- Tips to improve your score quickly
A good credit score is important to help maximize your financial well-being. Lenders will use it as part of their underwriting process to decide the credit options and terms they’ll offer you.
Luckily, there’s plenty of free resources at your disposal to get your credit reports and to find out your score, monitor it and improve it.
And remember, the information in your credit reports doesn’t stand still. It’ll change with time, so you’ll always be able to shape your credit behavior to improve your score.