If you’ve ever applied for a credit card or loan or even seen a commercial advertising a credit product, you are probably familiar with the concept of a credit score. However, it isn’t always clear exactly what your credit score means, how it is calculated and why it’s important. This guide will help you understand some of the basic information you need to know about your credit score.
What Is Considered a Good Credit Score?
There are two primary consumer credit score companies. FICO® creates several types of consumer credit scores that vary by industry and intended use. The base score that is used by many companies who do a credit check ranges from 300 to 850, with 670 to 739 being considered a good score. The industry-specific scores go from 250 to 900, but the same range is considered good.
VantageScore uses two different credit scoring models. The first ranges from 501 to 990 and the second from 300 to 850. 661 to 780 is defined as a good score for the current model. Individual companies may establish their own criteria that are different from the FICO® or VantageScore definitions. The majority of consumers in the United States have credit scores between 600 and 750.
What Is Considered a Bad Credit Score?
FICO® identifies scores between 580-669 as fair and 300-579 as poor. 16% of consumers fall into the poor range. VantageScore considers a score between 601-660 to be fair, 500-600 is poor and 300-499 is very poor. About 26% of consumers are considered to have a poor or very poor score.
Which Factors Affect Your Credit Score?
Multiple factors impact your credit score to different degrees. Your history of making on-time payments makes up 35% of your FICO® score. The amount you owe on your outstanding debt contributes another 30%. The total average age of your accounts and the age of your oldest and newest accounts is 15%. The mixture of types of credit you have and your most recent credit history contribute 10% each.
For VantageScore, the amount you owe, your credit usage, and your available credit are the most important factors. Credit mix and length of credit history come in second. Your history of on-time payments is third and the age of your credit history and recent credit usage plays a smaller role.
Why Do Credit Scores Exist?
Credit scores were created to be used as a tool by lenders and other decision-makers to determine how likely a consumer is to default on a loan, miss payments, or stop making payments altogether. Credit scores have traditionally been used by lenders and credit card issuers to determine whether to extend an offer of credit to an applicant. However, credit scores are sometimes used by utility companies, insurance companies, cell phone companies, employers, and other entities who use the information to predict the behavior of applicants for jobs or services.
Why Are Credit Scores Important?
The primary benefit of a good credit score is that it makes financing easier and cheaper to obtain. It also may make it easier for you to qualify for the best offers on a cell phone or other service. Consumers with poor credit may not be approved for loans, credit cards, and other services or may be charged higher rates or asked to meet other conditions, such as putting down a deposit. Additionally, some employers and insurance companies consider credit scores when deciding whether to hire an employee or extend an insurance policy.
A poor credit score can make it difficult to obtain credit or get approved for some services. It may also make it harder to find a job. However, by understanding the factors that influence your score, you can take steps to improve your credit history.