Everything You Need to Know About Credit Scores 

You have dozens of credit scores, and not all created equally.

If you had to choose whether to disclose your weight or your credit score to the world, which would you choose? If you’re like 70 percent of Americans, you’d rather keep your credit score to yourself.

It’s no wonder – the world of credit scores is confusing and fraught with misinformation. Sometimes, what you’d assume would be good for your credit can actually work against it and vice versa. That’s why taking the time to understand how credit scores work is crucial if you want a strong credit score that saves you money over time.

What Is a Credit Score?

Whether you want to borrow money, open a utility account or rent an apartment, you’re asking someone to trust in your ability to pay your bills on time. But lenders and landlords can’t call up every one of your credit card issuers since sophomore year and ask whether you’re good with money. They’re going to pull your credit score.

If your entire financial life could be boiled down to one number, it would be your credit score. It’s a three-digit figure that represents your history of borrowing and paying back money. The higher the score, the more trustworthy you’re considered to be by creditors.

Although you might scoff at the idea that your borrowing history could be reduced to a single arbitrary number, creditors take it very seriously. A poor credit score could mean paying sky-high interest rates on credit cards and loans (if you’re approved at all). You might be asked to pay a deposit upfront to open an electricity or cell phone account. And that dream apartment you applied for? The landlord might hand the keys to a tenant with better credit instead.

On the other hand, having a high credit score means borrowing money at the lowest rates available. You don’t have to worry about losing out or paying more because you appear financially irresponsible.

 Credit Score vs. Credit Report

Though they are closely related, a credit report and a credit score are different.

The three major credit bureaus – Experian, Equifax and TransUnion – collect your personal and financial information and compile it all into your credit report. Credit reports detail personally identifying information such as your name, address and Social Security number, as well as open and closed credit card accounts, loans, bills in collections, liens and bankruptcies. You’re entitled to a free credit report from each of the three major bureaus every year through , the only site federally authorized to provide free credit reports.

Using the information in your credit reports, credit bureaus will calculate a credit score that is then shared with banks, lenders and other organizations. And yes, because there are multiple credit bureaus, you have more than one credit report and credit score.

Types of Credit Scores

It might seem hard to believe: You have not one, not a few, but dozens of credit scores. However, they’re not all created equally.

Data analytics company FICO, short for Fair Isaac Corp., is the biggest and most ubiquitous source of credit scores. FICO produces credit scores for the three credit bureaus based on the information found in your credit reports. Since each bureau collects and reports your information independently, your FICO score will usually differ among them.

“Even under the FICO brand, there are several different models used for different purposes, like for considering a mortgage application versus a credit card application,” explains John Ganotis, founder of the website Credit Card Insider. This means you have multiple FICO scores with each of the three bureaus. In fact, it’s estimated there are more than 50 FICO scores alone.

Though FICO is the most widely known credit scoring model, it certainly isn’t the only one. “A little over a decade ago, the three credit bureaus started a joint venture and created VantageScore, a competing model for FICO scores,” says Lyn Alden, founder of Lyn Alden Investment Strategy, a website that provides market research to individual investors and financial professionals. She notes that VantageScore is now considered another “real” credit score used by lenders – but with less market share than FICO.

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How Credit Scores Are Calculated

The details surrounding how credit scores are calculated are still largely a mystery, as each agency’s algorithm is proprietary information. However, we know the FICO model is based on these five main credit score factors:

  • Payment history (35 percent): Paying your bills on time is not only important if you want to avoid late fees, it’s also the No. 1 factor in your FICO score. Indeed, payment history accounts for more than a third of that number. Even one or two missed payments can seriously impact your score.
  • Amounts owed (30 percent): The total amount of debt you owe in comparison to your total available credit is another important factor, accounting for a third of your FICO score. This is often referred to as your credit utilization ratio; experts recommend keeping it below 30 percent.
  • Length of credit history (15 percent): Lenders want to know you’ve been in the credit game for a while. The longer your credit history is, the better.
  • Credit mix (10 percent): The diversity of your accounts also helps boost your credit score. This shows that you can handle a variety of debts, such as credit cards, student loans or a mortgage. Of course, your accounts need to be in good standing or else they’ll negatively impact your FICO score.
  • New credit (10 percent): Too many hard inquiries and new accounts within a short period of time will throw up a red flag that you might be struggling to keep up with your bills. So if you’re rejected for a credit card, don’t try your luck elsewhere; wait several months and improve your credit first. And if you’re rate shopping for a home, auto or student loan, do so within about 45 days so that all the inquiries are treated as one. Fortunately, this factor only makes up 10 percent of your FICO score, so opening a new account every now and then will have a negligible impact.

Credit Score Ranges

According to Alden, the first two versions of VantageScore had different ranges than the FICO score (501 to 990). Now, the third is based on the same 300-to-850 score range that FICO uses.

“While exact percentages have not been revealed, VantageScore has revealed that it weighs its credit score similarly to FICO, with payment history and credit utilization being the most important factors,” Alden says. These are followed by age of credit, credit diversity and new credit as less important factors. “Usually, FICO scores and VantageScores for the same individual are close in number,” she notes.

When it comes to what constitutes good or bad credit, each creditor has its own definition. However, these ranges are considered standard, according to FICO:

  • Exceptional: 800 and above
  • Very Good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Poor: 579 and lower

Good news for many Americans: The national average FICO credit score now tops 700, according to FICO.

Keep in mind, however, that other scoring models might use different ranges. For instance, the Credit Optics scoring system by SageStream uses a range of 1 to 999, where a score of 374 is considered “pretty good,” according to a Los Angeles Times article. Bank of America is one example of a creditor that relies on Credit Optics as a “supplemental score” when making lending decisions.

But don’t stress about maintaining the perfect credit score for every algorithm out there. If you have a solid FICO score, you’re probably in good shape since this is the scoring model used by 90 percent of lenders when evaluating applicants.

How to See Your Credit Score for Free

It used to be that gaining access to your credit score meant subscribing to pricey and often unnecessary credit monitoring services. However, many companies have made strides in bringing a level of transparency to consumers that financial institutions have enjoyed.

Free FICO Scores

Since your FICO score is the one most often used by lenders, it’s the score you should be most interested in monitoring. It’s also the most difficult to find for free.

Even so, there are a handful of sources you can rely on to provide your FICO score each month at no cost: credit card companies. For instance, Chase Slate cardholders have access to their free monthly FICO score based on data from Experian. Bank of America offers free FICO scores to its credit card customers in partnership with TransUnion.

There are a number of other financial institutions and companies that provide free credit scores, but these scores might not be what you expect.

Free VantageScore and non-FICO Scores

Most other sources of free credit scores won’t actually provide your FICO scores. Rather, they offer credit scores based on alternative scoring models, which can vary significantly from your FICO score. The scores are meant for informational purposes only and aren’t used by creditors.

Even though the scores aren’t necessarily your real scores, they can help you evaluate the general health of your credit.

Some banks and credit unions provide free scores to customers and the general public. U.S. Bank, for example, offers free TransUnion educational scores to customers via the TransUnion CreditView Dashboard. Capital One offers a similar tool called CreditWise, which allows access to your TransUnion VantageScore 3.0.

There are a number of websites and apps that also provide free credit scores, the most well-known of which is Credit Karma. This site provides both credit reports and VantageScore 3.0 credit scores from TransUnion and Equifax. Again, VantageScore isn’t relied upon by lenders nearly as often as FICO is, but it does follow a similar scoring model and will give you an estimate of your crStriving for Excellent Credit

With so many types and sources of credit scores, working toward good credit might feel overwhelming. However, if you take a step back and focus on the basics, you can grow your credit score without too much thought.

“Even though there are many different credit scoring models that generate a variety of scores, these different models generally consider similar factors,” says Ganotis. “My advice for people who want to maximize their credit scores is to focus on the fundamentals of good credit instead of obsessing over slight fluctuations in points on a specific credit score you’re monitoring.” If you do this, he says, you should see your credit score go up over time.

Based on the five factors that impact your FICO score, these tips can help you build good credit over time:

  • Pay your bills on time. When it comes to your credit score, paying all your bills on time is the single best thing you can do.
  • Keep your credit utilization under 30 percent. Actively using credit cards is a great way to keep your credit score healthy. Just be sure you’re not using up more than 30 percent of your available credit at any given time. And always pay the total off each month if you can – you don’t have to carry a balance and incur interest charges to build good credit.
  • Start using credit early. Since your credit history is a moderately important factor in your credit score, don’t wait to start using credit. Even if you open a credit card and charge $20 each month, you will make strides in building a strong history. And note: FICO treats open and closed accounts the same, so don’t be afraid to close a credit card account that’s costing you money.
  • Diversify your credit. When it makes sense financially, explore other credit options such as financing a car or consolidating credit card debt with a personal loan. Paying off a mix of credit types will help boost your score.
  • Slow down on new accounts. As tempting as it is to chase every sign-up bonus and zero percent APR offer, allow some breathing room in between account openings so you don’t look desperate for funds.

Credit scores might be complex, but sound money management doesn’t have to be. By paying your bills on time, spending wisely and only borrowing what you need, you should see your credit score soar.

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