What is a Credit Score?

May 20, 2020 | by Jacob Hamilton

what is a credit score

A credit score is a three-digit representation of your credit history to help lenders determine your credit risk. Think of it like a snapshot of your financial resume.

Imagine that you were fired from a job for misconduct and you were required to display that on your resume. That wouldn’t look promising to a future employer, right?

Now, imagine you had an unalterable financial resume showcasing your credit history for the past 10 years. That’s where your credit score comes in.

A credit score is calculated on a scale from 300 to 850, with higher scores being better.

Credit score ranges are typically:

  • Poor: <580
  • Fair: 580 – 669
  • Good: 670 – 739
  • Very Good: 740 – 799
  • Exceptional: 800+

credit score chart

How Is Your Credit Score Calculated?

It’s not uncommon to see different credit scores when you go to different sources. That’s because there are two basic credit scoring systems that most lenders model their scoring after: FICO® and VantageScore.

The most prominent credit scoring system is FICO, which was developed over 30 years ago. Many lenders rely on FICO to determine if they should extend credit to a borrower. In an effort to compete with FICO, credit bureaus developed a scoring system called VantageScore in 2006.

The two scoring systems consider similar factors, but weigh them differently. No matter where you pull your credit score from, it’s important to stay on top of these five main scoring factors:

  • Payment history: This shows if you’ve paid past accounts on time.
  • Amount owed: This weighs the percentage of available credit you owe on accounts.
  • Length of credit history: This takes into account how long your accounts have been open, how long they were kept open and how long it’s been since you used each account.
  • Credit mix : This shows the types of credit accounts you have open, such as mortgage loans, car loans, credit cards, finance accounts and more.
  • New credit : This shows how much time has passed between opening new accounts.

Credit scoring systems are updated occasionally to weigh these five factors differently, so keep that in mind if you see your score evolve even when there are no changes to your credit history.

Who Looks at Your Credit Score?

Your credit score can be obtained by many different organizations if they have a direct business need for it. These include banks, lenders, utility companies, insurance companies, student loan providers, landlords and more.

These organizations use your credit score to determine your credit risk, ultimately deciding if they think you’re responsible enough to get your request approved.

Imagine that you’re in the market for a new car, but you don’t have the finances to cover the cost of the entire vehicle. You’ll fill out an application for an auto loan, which allows you to pay for the car in installments. Auto lenders will use your credit score to determine if they’re willing to lend you the money and at what interest rate. The better your credit score, the better the offer you might get.

The same goes for other industries, so it’s important to continuously improve your credit score and dispute any errors on your report.

How Do You Check Your Credit Score?

You have a few options to access your credit score, including:

  • Personal finance websites: Many personal finance websites will offer free credit reports from one of the three credit bureaus on a monthly or bi-weekly basis.
  • Credit card companies: If you have a credit card, many companies offer a free monthly credit report online or through their mobile application. Even if you’re not a customer, some credit card companies, such as Discover, offer free credit reports for anyone.
  • Credit bureaus: You’re usually entitled to a free copy of your credit report annually from each of the three major credit bureaus: TransUnion, Experian and Equifax. Through April 2021, though, you can actually get your credit report weekly if you want to. Keep in mind, these do not include your credit score.

Whatever service you decide to use to access your credit score, check it consistently. That way you can tell if your score is improving or worsening and changes don’t take you by surprise.

How Can You Improve Your Credit Score?

If you aren’t happy with your credit score, you can always work toward improving it. Learn more about how you can improve your credit score with specific financial decisions.

  • Always pay on time: Paying your bills on time is one of the best things you can do, because your payment history accounts for 35% of your credit score. Missing payments can have a significant negative impact that you’ll want to avoid. .
  • Reduce your debt: Even if you’re unable to pay off all of your debt, you can strategically manage your payments. Try to pay off your debts with the highest interest rates first while making minimum payments on your debts with the lowest interest rates. In addition, consistently pay off any credit card debt to show to lenders that you can pay off the same amount month over month.
  • Be aware of what credit accounts you have: Credit mix is a factor in your credit score, but it doesn’t look good to lenders if you quickly open and close accounts. A good rule of thumb is to only open credit accounts if you need them.
  • Keep credit utilization at 30%: Avoid spending more than 30% of your total credit limit on each account. For example, if you have a limit of $2,000 on one credit card, try not to carry more than $600 on that card.
  • Take age into account: Length of credit history makes up 15% of your credit score. There’s no way around this one—all you can do is keep your accounts open, even if you’re not using them, to showcase the age of your credit.
  • Now that you understand what your credit score represents and how it can be improved, you’re on the right track. Take steps to improve your credit score and show your creditworthiness to future lenders today, and get in touch with CreditRepair.com if you’re interested in learning more.

Jacob Hamilton

Jacob Hamilton

GM of CreditRepair.com

With his master's degree from the University of Phoenix, Jacob has been working as the General Manager for CreditRepair.com for 2 years. Jacob is passionate about consumer finances and doing everything he can to make credit repair accessible....

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