Credit Score 101

What is a Credit Score?

A credit score rates a consumer’s creditworthiness using a range from 300 to 850. This number indicates the risk level of a borrower. A higher credit score indicates a better borrower to prospective lenders.

Credit scores are determined by an individual’s credit history, including the number of accounts currently open, the amount of debt currently owed, the length of time payments have been made on current accounts, and other information. Lenders use credit scores to determine whether individuals are likely to repay loans on time.

Only three credit bureaus in the U.S.—Equifax, Experian, and TransUnion—are of major national significance. This trio dominate the market for collecting, analyzing, and disseminating information about consumers.

The FICO Score is the most frequently used credit score model. FICO, now known as Fair Isaac Corp., created the credit score model. Other credit scoring systems exist, but the FICO Score is by far the most common. An individual’s score can be improved in a variety of ways, including paying off loans on time and keeping your debt low.

Importance of Credit Score

Your credit score determines whether you’ll be granted a loan and the interest rate you’ll pay. Employers also check it to see whether you’re a dependable person. Service providers and utility companies may look at it to determine whether you have to make a deposit to use their service. Even landlords use this to determine if you can get an apartment or not. It goes even further, and can even affect whether you’ll get the best cell phone plans. 

Lenders frequently examine borrowers’ scores, particularly when determining whether to raise interest rates or credit limits on credit cards. Basically, your credit score can be a hammer or a lever based on how good it is. Bad scores are a hammer, as you end up paying more and missing out on so much. On the other hand, good credit is a lever as you’ll reap the benefits of low-interest rates and great deals regardless of your age or income. 

How Credit Scores Work

Your credit score can have a significant impact on your financial life. It is vitally important to lenders when deciding whether or not to grant you credit. People with credit scores below 640 are considered subprime borrowers. Subprime mortgages are often charged higher interest rates than conventional mortgages to compensate for the higher risk they carry. Borrowers with low credit scores may also require a shorter repayment period or a co-signer.

A credit score of 700 or higher is often considered very good, and borrowers with such scores may be eligible for lower interest rates and, consequently, pay less interest over the life of the loan. Scores above 800 are regarded as excellent. Credit scores are rated on a scale defined by each creditor, but the FICO model is frequently used.

The Factors That Determine Your Credit Score

Consumers’ credit histories are recorded and maintained by three major credit reporting agencies in the United States (Equifax, Experian, and TransUnion). Although the information collected by the credit bureaus may differ, five primary variables are used to determine a credit score:

  1. Payment history: The payment history is 35% of a credit score and reveals whether a person pays their obligations on time. 
  2. The total amount owed: The proportion of credit available to a person that is utilized, known as credit utilization, contributes to 30% of the credit score.
  3. Length of credit history: The length of credit history is 15%, with longer credit histories being considered less risky because there is more data to assess payment history.
  4. Types of credit: 10% of the credit score is determined in part by the ratio of installment credit, such as car loans or mortgages, to revolving credit, such as credit cards.
  5. New credit: 10% of a person’s credit score is also affected by whether he has a mix of new credit accounts, how many new accounts he has recently applied for, whether he has recently applied for credit inquiries, and when he opened his most recent account. 

If you have several credit cards, but don’t use some of them, closing those credit cards may actually negatively impact your credit score. Rather than throwing out unused credit cards, keep them safely in separate envelopes, organized by category. Go online to access and verify each card, ensuring that there are no balances and that your address, email address, and other information are accurate. 

Make sure you don’t have autopay set up on any of these credit cards. Make certain you have your email address or mobile phone number in the notification section so you are notified if something goes awry. Check them every six months or annually to ensure that no charges are made or that there are no irregularities.

VantageScore

In 2006, Equifax, Experian, and TransUnion credit bureaus created VantageScore as an alternative to Fair Isaac Corp.’s FICO Score, a consumer credit rating product. According to Equifax, Experian, and TransUnion, VantageScore employs machine learning techniques to produce a more accurate picture of a consumer’s credit. 

According to research conducted by consulting firm Oliver Wyman, the use of VantageScore has increased by about 20% annually since June 2015, accounting for about 90% of all credit scores. The FICO score, which is used by about 90% of all lenders, remains the most popular credit score. More than 12 billion VantageScores were used by over 2,500 users between July 1, 2018, and June 30, 2019, according to the most recent research. Credit card issuers and banks were the most ardent VantageScore users.

FICO and VantageScore scores differ in several respects. FICO creates a bureau-specific credit score for each of the three credit bureaus, using only that bureau’s data. Consequently, the three scores are really three distinct scores, each of which is determined by a distinct bureau. VantageScores, on the other hand, are single, tri-bureau credit scores, and each bureau uses them. 

How to Improve Your Credit Score

An individual’s credit score can rise or fall depending on new information when information is updated on their credit report. In order to improve their credit score, consumers can take the following actions:

Pay bills on time: Always ensure your bills are paid on time. If you have bad credit, you’ll have to make timely payments for six months consecutively before seeing a difference in your credit score.

Increase your credit line: Ask about getting a credit increase on your credit card accounts. This should be fairly easy if you have good standing. But once you do get an increase, make sure you are still keeping a low credit utilization rate. 

Keep your credit card accounts open: Don’t close any credit card accounts, even when you stop using the card. If you close an account, your credit score might be hurt depending on the card limit and age. For example, let’s say you have a $1,000 debt with a credit limit of $5,000 shared evenly between two cards. This puts your credit utilization rate at 20%. Closing one of the cards takes your credit utilization to 40%, negatively affecting your credit score.

Work with a credit repair company: At t times the idea of improving your credit score can feel overwhelming, and you may not even know how to improve your credit score on your own. Getting the best credit repair company to work with you will ease your stress. They’ll help negotiate with creditors and the three credit bureaus. They’ll also offer you advice to maintain a good credit score. 

Frequently Asked Questions

What is a credit score?

A person’s credit score is determined by a number from 300 to 850 which indicates their creditworthiness. Credit scores factor in repayment history, the types of loans, the length of credit history, and their debt amounts, in addition to other factors.

 

What is the ideal credit score to have?

Credit scoring models vary in terms of range, but scores from 580 to 669 are typically classified as fair; 670 to 739 are usually rated good; 740 to 799 are generally rated very good; and 800 and higher are usually rated excellent.

 

Who is responsible for calculating credit scores?

The credit reporting industry in the United States is dominated by three major players: Equifax, Experian, and TransUnion. There are, in fact, several credit bureaus, but only these three are of national significance. Collecting, analyzing, and disseminating information about consumers is what these businesses do.

Conclusion

Your credit score is one number that can either cost or save you a lot of money in your lifetime. If you have a great score, you will pay less interest on any line of credit you take out. However, it is up to you, the borrower, to maintain a strong credit score so that you can have access to more loans, if necessary.

Thank you for reading our article. We hope you learned new ways to battle creditors and banks while protecting yourself.

We would encourage you to become a member of HigherScoreNow.com and start to leverage all the benefits of having good credit. You deserve this.