Miranda is an award-winning freelancer who has covered various financial markets and topics since 2006. In addition to writing about personal finance, investing, college planning, student loans, insurance, and other money-related topics, Miranda is an avid podcaster and co-hosts the Money Talks News podcast.
As a 30+ year member of the AICPA, Nancy has experienced all facets of finance, including tax, auditing, payroll, plan benefits, and small business accounting. Her résumé includes years at KPMG International and McDonald’s Corporation. She now runs her own accounting business, serving several small clients in industries ranging from law and education to the arts.
A credit score is a three-digit snapshot of your creditworthiness. Lenders, landlords, and even some employers use it to decide approvals and set terms.
Which factors affect my FICO score the most?
The formula weighs five areas: payment history (35%), credit utilization (30%), length of credit history (15%), credit mix (10%), and new credit (10%).
Why do my credit scores vary by source?
Lenders report to bureaus at different times and not all report to all threeâEquifax, Experian, and TransUnionâso scores can differ.
Youâve probably heard a car commercial that mentions how âwell-qualifiedâ buyers can get a 0% interest rate for 72 months. Or maybe youâve had to provide a bigger security deposit for an apartment compared to a friend with the same income.
What does it all mean? You can find the answer in your three-digit credit score. If you have a good credit score, you can expect to see lower loan rates and smaller rent deposits.
Key Points
Your credit score is based on information in your credit report.
Factors affecting your credit score include payment history, percentage utilization, and new applications.
In general, a credit score below 580 is poor and anything above 800 is excellent.
Hereâs what you need to know about credit scores.
What is a credit score?
A credit score is designed to give lenders and other financial service providers a quick look at how you handle credit. Information from your credit report (or credit history) is fed into a complicated mathematical formula, and the result is your credit score.
The most widely used credit score is the FICO score, designed by the Fair Isaac Corporation. This model gives you a score between 300 and 850. The higher your score, the lower the credit risk you present to a lender. Other people, like landlords, might also pull your credit to determine whether they think youâre likely to make your rent payments on time.
Your credit history creates a âstoryâ of you.
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What factors determine your credit score?
Five main factors are used in your FICO score. Other credit scoring models might emphasize factors differently, or they might use additional factors. For the most part, though, you can expect the following to affect your score:
Payment history. Whether you pay on time and in full each month is the most important factor in your credit score, accounting for about 35% of the total.
Credit utilization. About 30% of your score is influenced by how much of your available credit card balances youâre using. For example, if you have a credit line of $2,000 and you have a balance of $500, your credit utilization is 25%. Itâs best to pay off your credit cards each month. Once you get above 30% credit utilization, youâre likely to see a bigger negative impact.
Length of credit history. How long youâve had credit, and the average age of your accounts, is the next important factor, making up 15% of your credit score.
Credit mix. Your credit score also takes into account whether you have a mix of revolving and installment credit. Revolving credit consists of accounts where you have a maximum credit line and can pay as you go. Credit cards are revolving accounts. Installment accounts have fixed payments and a set paydown schedule, such as a car loan. Your credit mix makes up about 10% of your credit score.
New credit. Finally, whether youâve applied for many loans in a short time accounts for 10% of your credit score.
Why are my credit scores different?
Youâve probably noticed you have different credit scores. Thatâs because the information in your credit report is voluntarily provided by lenders. Some creditors and lenders report only to one of the three credit reporting agencies (Equifax, Experian, or TransUnion), while others report to all of them.
Sometimes information is reported at different times. For example, if a credit card issuer reports your balance in the middle of the month, it might look like youâre using a lot of your available credit line. This could drag down your credit score.
On the other hand, if your information is reported right after you make a credit card payment, it shows that youâre using a smaller percentage of your line, which would make your score a bit higher.
Each score is based on the information from a credit report. So if youâre looking at your FICO score, you might see an Equifax score and a TransUnion score.
Are there alternatives to the FICO score?
Your credit report can be used in other credit scoring models. For example, some banks take the basic formula provided by companies like FICO and then tweak them based on different risk factors and the type of loan youâre applying for. The modified formula might be used specifically for a home mortgage or car loan. Each of those scores would be different, and theyâd be different from your FICO score.
Free consumer websites such as Credit Karma and Credit Sesame might use scoring models that differ from the models used by banks.
In addition, the three major credit reporting agencies created the VantageScore, which highlights different information from FICO. But the VantageScore isnât used as widely.
Finally, depending on the state you live in, your credit report might be used to calculate an âinsurance score,â which auto insurance companies use to set your premium.
How do I know if I have good credit?
To qualify for the best credit card deals and get the lowest mortgage or car loan rates, you need a higher credit score. When looking at FICO scores, there are different ranges that indicate whether you have âgoodâ or âbadâ credit.
Excellent: 800 and above
Very good: 740â799
Good: 670â739
Fair: 580â669
Poor: Below 580
In most cases, you can get a credit card or car loan with fair credit. If you want access to the best rewards credit cards, youâll likely need a credit score above 670. Although you can get a mortgage with a low credit score, most home lenders wonât consider you unless you have a score of at least 620 to 640, and you wonât qualify for the best rates unless you have 720.
The bottom line
Your credit score is a simple number, but it comes from a complex calculation. Itâs not something to ignore. If you want the best deals on loans, rentals, and possibly car insurance, you need to make sure youâre working to keep your credit score as high as possible.
