Credit Scores: Know the Facts to Your Number

Jul 29, 2020Credit Help

Credit scores are important numbers no matter how we think about it. It will usually determine whether or not a bank will lend you money, what the interest rate will be, and those two factors determine if you can get money and how much will it actually cost you. So a good credit score that gets you a better interest rate is something to shoot for because it will save you money. You’re undoubtedly aware credit scores are a big thing but do you know how they are actually determined? What the metrics are? Do you know what your score is?

It’s not rocket science so don’t be worried about some complicated mathematical equation you’ll have to sort through. Read on and we’ll see what goes into your credit score.

What Are Credit Scores?

There are three credit bureaus who keep track of your payment history and loans you’ve had or have. They are:

  • Experian
  • Equifax
  • TransUnion

These bureaus use an equation based on your credit history to come up with a 3 digit number that lenders use to determine your viability to give loans to. A poor credit rating will make it harder for you get a credit card or loan. If they are willing, you might just get a higher interest rates on a card or loan. This makes debt more expensive. If you have a high credit score you’ll be able to get many other loan and credit card varieties, have a higher monthly limit, and have far lower interest rates. This will save you money!

The Model Makes The Number

As we saw there are three different credit bureaus, and there are also different models or equations that are used to determine your three-digit credit score. In the United States, the 2 most popular credit scoring models are FICO and VantageScore. There are other models that provide a more specialized credit rating like “CE Credit Scores” which is used by Quicken Loans or “Insurance Credit Scores” which will determine your insurance payment premiums. All of these individual models will have a different algorithm for determining your credit score through their metric. So there are some specialized models but the most common ones are FICO and VantageScore.

Unfortunately, when you apply for a credit card or loan you don’t get to determine what score is used. This means that your best bet is making your credit as strong as possible through on-time payments and avoiding collections.

Your FICO Credit Score At A Glance

FICO credit scores are the three-digit number that is a credit score we’ve all gotten used it. That number ranges from 300 (poor) – 850 (excellent). Scores of 600 or less are considered poor and on the other end of the spectrum, any score 750 or higher is an exceptional credit score. The vast majority of people will fall somewhere in the middle of the credit rating scale. Here is a breakdown of the ranges:

  • 350-579: Very Bad/Poor Credit – ineligible for credit cards/loans, very high-interest rates
  • 580-669: Descent/Fair Credit – Not likely to get a loan or one with high-interest rates
  • 670-739: Good Credit – May receive an average interest rate on credit cards and loans
  • 740-799: Very Good Credit – likely to receive a good or better than the average interest rate
  • 800-850: Outstanding Credit – you’ll have your choice of loans and lender with good credit card offers and the best interest rates in the business

How Is Your FICO Score Determined?

FICO uses a few different factors to determine your credit score.

  • Credit Mixture (10%) – how are you using your credit? Car loans? Credit cards?
  • New Credit Credit (10%) -how many new credit cards or loans do you have?
  • Length Of Credit History (15%) – have you had loans and cards before or not?
  • Credit Utilization (30%) – How much of your credit are you using?
  • Payment History (35%) – Do you make payments on time?
  • Every factor is important but some carry more weight than others. As you can see Payment History is very important so it’s crucial to make sure you’re making payments on time.

What Is The Breakdown For A VantageScore?

VantageScores range from 300-850. It uses similar metrics to the FICO rating but with a different weighting of the various factors. There are a few other differences such as the fact that VantageScore doesn’t count collections but FICO does. Also, VantageScore looks at all your balances for credit cards, mortgages, loans, etc.

What Makes a Credit Score So Important?

It really boils down to the fact that lenders will always check your credit score. Here is what a low credit score means:

Denial of Loan Application: a bad credit rating will close lots of opportunities as the vast majority of lenders simply will deny your application.

Bad Interest Rates: if a loan is provided it will be at very high-interest rates which will make it cost you more money month to month and over time.

Small Credit Limits: if a credit card is provided it will have low limits of what you can spend/borrow each month.

Ways To Improve Your Credit Score

There are a few ways to improve your credit and you should be doing all of these to the best of your ability.

Pay Your Bills On Time: the most effective way to increase your credit score is to make all of your payments on time. Be sure you know what needs to be paid and when so that you can properly schedule your payments. It’s a smart idea to pay them on “auto-pay” so that you don’t even have to think about it. But if you’re someone who does your bills manually be sure that you’re knowing what you need to pay and when.

Pay Off Your Balances: If you’re able to you should pay down your overall balances. Begin with cards that have high-interest rates or high balances and try to get them down to about 1/3 of the current balance.

Mix Your Credit: If your score is ok or average and you want to get into that good or exceptional rating, look to mix up the type of credit you have. Put your name in utility bills if they aren’t or phone bills. Variation in the type of credit you have will improve your score.

Check Your Credit

Some people put off checking their credit score for fear it will be a very poor number or think that if they check their score it will someone reduce their score. That is far from the truth. A hard inquiry (where a bank or other lender checks your score) can indeed hurt your score in the short run. A soft inquiry happens when you check your own credit individually. It does not affect your credit score at all. You can check it every week if you are actively working on improving your score.

You can get free credit reports from the three bureaus once every year from or you can use other sources for free credit reports.

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