- Poor: Less than 580
- Fair: 580 - 669
- Good: 670 - 739
- Very Good: 740 - 799
- Exceptional: 800+
A credit score is a number (from 300 to 850) used by lenders to evaluate how likely they believe you will be to pay back a loan. Individuals with higher credit scores are more likely to be approved for loans and more likely to be given favorable interest rates. Most types of credit providers use credit scores, from credit card companies to mortgage, student, and auto loan companies.
While there are two major types of credit scores (FICO and VantageScore), we will be focusing on FICO scores since they are the most widely used by lenders. FICO scores can generally are broken down into five buckets:
These scores are reported by a credit bureau, which is an agency that packages and analyzes information from consumer credit reports to determine your credit score. The three major credit bureaus are Equifax, TransUnion, and Experian. It is important to note that credit scores change with time. If you check your credit scores once a month, you’ll notice a slight variation from month-to-month. These changes happen because the data used in calculating your credit score also changes from month-to-month, as we’ll get into below.
The five categories to consider when calculating your FICO score are:
Credit bureaus want to see that you haven’t missed any payments. If you have, they want to see that these have not been frequent or recent occurrences.
Credit bureaus want to see that you don’t have much debt and aren’t using a large portion of your available credit (e.g., you’re nowhere near your borrowing limit on credit cards)
Credit bureaus want to see that you have established credit over a long period. Generally, the longer your accounts have bee outstanding, the better your credit score will be.
When you apply for a new credit card or loan, the lender asks to view your credit report. These reports are sourced from one of the three major credit agencies referenced above through a process known as a “hard inquiry.” Each inquiry can lower your credit score by a few points at a time.
There are two types of credit accounts: revolving accounts and installment accounts.
Revolving accounts are accounts that provide you with more flexibility regarding the amount paid monthly. These include credit cards, retail store cards, gas station cards, and home equity lines of credits or (HELOCs).
Installment accounts are accounts that usually require a fixed payment each month until the loan is fully paid off. These include mortgage loans, auto loans, and student loans.
Lenders like to see that you have used a mix of revolving accounts and installment accounts to prove that you can successfully manage different types of credit.
Even though a broader credit mix can help with your credit score, this only comprises 10% of the total formula. On the other hand, a new loan would result in a hard inquiry from a lender and an increase in the total debt you owe. Both of these would reduce your credit score. Therefore it is generally advisable to only take out new forms of credit when you actually need it.
There are many ways to check your own FICO score. Several credit card companies and banks allow you to check your credit score if you use their credit cards. These include Discover, American Express, Citibank, Bank of America, Ally Bank, and many credit unions as well. If your credit card company does not provide you with free credit scores, you can also go to freecreditscore.com to view your FICO score for free.
Do you have a particular question about credit scores? Feel free to reach out with any questions.