How Are Credit Scores Determined
A credit score is a number that indicates your perceived creditworthiness in the eyes of credit rating companies, banks and other financial institutions. If you have a history of paying your bills on time and only using a small percentage of your available credit, you should have a high score. If youve missed bills, filed for bankruptcy, defaulted on loans or dealt with collections, then your score will likely be lower.
Heres a deeper breakdown of what goes into the creation of your credit score:
- Payment history: 35% of your score
- 30% of your score
- 15% of your score
- New credit applications: 10% of your score
- 10% of your score
The most well-known provider of credit scores is the Fair Isaac Corporation, or FICO. However, each of the three credit bureaus has its own take on your score. This is known as a VantageScore, and it is a modified version of your FICO score thats based on both the credit bureaus scoring models and their own information on your credit history.
There are also different FICO credit scores for bank cards, auto loans and more. Thats why a single person can have several credit scores. Different bureaus may treat credit events or authorized user accounts differently, so you may have excellent credit according to your Transunion credit score, but still be in the good range with your Equifax score.
The 5 Biggest Factors That Affect Your Credit
InvestopediaForbes AdvisorThe Motley Fool, CredibleInsider
A is a number that lenders use to determine the risk of loaning money to a given borrower.
Here are the five biggest things that affect your score, how they affect your credit, and what it means when you apply for a loan.
You May Still Have Credit Reports
A lack of a score doesn’t always mean you have a complete lack of credit history. Equifax, Experian, and TransUnion each track things a bit differently, but one or all could have data on you. It’s also possible that your credit report will show activity that’s too old to be counted in a or too recent to show up. Scores generally only count the past two years in their scoring model.
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Fico Credit Score Ranges For 2021
The sheer number of credit scores makes it hard to name a definitive cut-off for good credit. Thats because some credit scorers max out at 750, while others might cap at 850 or 990. A lender whos assessing your creditworthiness for, say, a mortgage, will look at several different scores to get a sense of the likelihood that you will pay back your debt on time.
Check out the chart below to see the consensus FICO credit score ranges. For scores that max out at 850, a score of 670 or higher is generally considered to be good. If youre unsure whether your credit score will get you the lowest mortgage rates, you can always reach out to a mortgage broker directly.
|2021 FICO Credit Score Ranges|
Other Services Credit Karma Offers
Credit Karma will access your credit information from TransUnion and Equifax, two of the three major consumer credit agencies. It will come up with its own independent rating based on VantageScore. You will then receive your current VantageScore rating and the more detailed credit reports behind it.
In addition to this free service, Credit Karma has other related services, including a security monitoring service and alerts for when someone has conducted a credit check on you. This is not unique to Credit Karma: Many of the best credit monitoring services provide similar alerts and services.
When you share your personal information with Credit Karma, you can search for personalized offers for a credit card, a car loan, or a home loan, and your search won’t pop up in your credit report on Credit Karma or anywhere else. A standard section of credit reports is “inquiries,” which lists requests for your report from lenders you’ve applied to for a loan. Credit Karma allows you to limit the number of inquiries you make.
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How To Improve Your 700 Credit Score
A FICO® Score of 700 provides access to a broad array of loans and credit card products, but increasing your score can increase your odds of approval for an even greater number, at more affordable lending terms.
Additionally, because a 700 FICO® Score is on the lower end of the Good range, you’ll probably want to manage your score carefully to prevent dropping into the more restrictive Fair credit score range .
40% of consumers have FICO® Scores lower than 700.
The best way to determine how to improve your credit score is to check your FICO® Score. Along with your score, you’ll receive information about ways you can boost your score, based on specific information in your credit file. You’ll find some good general score-improvement tips here.
What Counts Toward Your Score
Your credit score shows whether or not you have a history of financial stability and responsible . The score can range from 300 to 850. Based on the information in your credit file, major credit agencies compile this score, also known as the FICO score. Here are the elements that make up your score and how much weight each aspect carries.
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What Is A Vantagescore
VantageScore was created by the three major credit reporting agenciesExperian, Equifax, and TransUnion. It uses similar scoring methods to FICO but yields slightly different results.
One of the primary goals of VantageScore is to provide a model that is used the same way by all three credit bureaus. That would limit some of the disparity between your three major credit scores. In contrast, FICO models provide a slightly different calculation for each credit bureau, which can create more differences in your scores.
Understand The Benefits Of A Good Credit Score
A credit score in the good range may reflect a relatively short credit history marked by good credit management. It may also characterize a longer credit history with a few mistakes along the way, such as occasional late or missed payments, or a tendency toward relatively high credit usage rates.
Late payments appear in the credit reports of 33% of people with FICO® Scores of 700.
Lenders see people with scores like yours as solid business prospects. Most lenders are willing to extend credit to borrowers with credit scores in the good range, although they may not offer their very best interest rates, and card issuers may not offer you their most compelling rewards and loyalty bonuses.
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How To Find Your Fico 9 Score
Earlier, it was mentioned in this post that FICO Score 9 was introduced to lenders in 2014 and consumers in 2016lets elaborate on the latter part. In 2016, consumers at large were allowed to access and view their credit scores that the FICO 9 credit scoring model had calculated.
Today, its still possible to find and know your FICO 9 score, and you have a few ways to go about it:
By getting your score directly from FICO themselves at myFICO.com. This, however, costs you money.
Lenderslike credit card companiesoften offer free credit score checks to their customers, to help them stay up to date with their credit scores. However, before doing this, double-check whether the score youre getting is indeed from the FICO 9 credit scoring model, or whether its a score calculated from another FICO credit scoring model, or even from the likes of VantageScore.
Does Applying To Refinance Trigger A Hard Inquiry
Applying to refinance your mortgage or vehicle will trigger a hard inquiry. Since you are applying for a new line of credit that will buy out your old line of credit, lenders need to see a full and detailed credit report. Condensing your refinancing shopping time to a window of two weeks will help minimize damage, this way multiple hard inquiries for auto loans will count as one hard inquiry.
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Credit Score: Is It Good Or Bad
Your score falls within the range of scores, from 670 to 739, which are considered Good. The average U.S. FICO® Score, 711, falls within the Good range. Lenders view consumers with scores in the good range as “acceptable” borrowers, and may offer them a variety of credit products, though not necessarily at the lowest-available interest rates.
21% of U.S. consumers’ FICO® Scores are in the Good range.
Approximately 9% of consumers with Good FICO® Scores are likely to become seriously delinquent in the future.
You Have Fewer Options For Credit
While you can still access some forms of credit without a credit score, itâs very difficult to do so. Plus, itâs likely that youâll be shut out of some of the better credit options. Yes, itâs true that you need credit to get credit. So, what should those without a credit score do? Consider some of the other credit-building activities listed later in this article.
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Impact Of Credit Inquiries
VantageScore and FICO both penalize consumers who have multiple hard inquiries in a short period of time. They both also conduct a process called deduplication.
Deduplication is the practice of allowing multiple pulls on your credit for the same loan type in a given time frame without penalizing your credit. Deduplication is important for situations such as seeking auto loans, where you may submit applications to multiple lenders as you seek the best deal. FICO and VantageScore dont count each of these inquiries separatelythey deduplicate them or consider them as one inquiry.
FICO uses a 45-day deduplication time period. That means credit inquiries of a certain typesuch as auto loans or mortgagesthat hit within that period are counted as one hard inquiry for the purpose of impact to your credit.
In contrast, VantageScore only has a 14-day range for deduplication. However, it deduplicates multiple hard inquiries for all types of credit, including credit cards. FICO only deduplicates inquiries related to mortgages, auto loans, and student loans.
Staying The Course With Your Good Credit History
Having a Good FICO® Score makes you pretty typical among American consumers. That’s certainly not a bad thing, but with some time and effort, you can increase your score into the Very Good range or even the Exceptional range . Moving in that direction will require understanding of the behaviors that help grow your score, and those that hinder growth:
Late and missed payments are among the most significant influences on your credit scoreand they aren’t good influences. Lenders want borrowers who pay their bills on time, and statisticians predict that people who have missed payments likelier to default on debt than those who pay promptly. If you have a history of making late payments , you’ll do your credit score a big solid by kicking that habit. More than one-third of your score is influenced by the presence of late or missed payments.
Utilization rate, or usage rate, is a technical way of describing how close you are to “maxing out” your credit card accounts. You can measure utilization on an account-by-account basis by dividing each outstanding balance by the card’s spending limit, and then multiplying by 100 to get a percentage. Find your total utilization rate by adding up all the balances and dividing by the sum of all the spending limits:
42% Individuals with a 700 FICO® Score have credit portfolios that include auto loan and 29% have a mortgage loan.
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Types Of Credit In Use: 10%
The final thing the FICO formula considers in determining your credit score is whether you have a mix of different types of credit, such as credit cards, store accounts, installment loans, and mortgages. It also looks at how many total accounts you have. Since this is a small component of your score, don’t worry if you don’t have accounts in each of these categories, and don’t open new accounts just to increase your mix of credit types.
How Consumers Can Improve Their Fico 9 Score
Want a good, very good, or even excellent credit score? Well, heres some good news. No matter if your lenders are using FICO Score 2, 8, or 9or a mix of these and othersas long as you stick to established consumer best practices, youll gradually get a better credit score when a FICO credit score model assesses you.
Essentially, it all boils down to:
Paying fully and on time. Your credit score is severely impacted when you dont pay bills on timeand the later its paid back, the worse the damage is. 35% of your FICO credit score is influenced by your payment history, so its imperative to pay back fully, and on or before the deadline. To make it easier for yourself, automate the payment of recurring bills and subscriptions, so you dont have to lift a finger.
Minimizing credit utilization, and owing back as little as possible. Its not a good idea to constantly use all the credit available thats to youitll appear as if youre financially in over your head. Instead, try to use 30% or less of your available credit. By continually using 30% or less, you can actually improve your overall credit score, too.
Having a credit mix. If you have a mix of different types of credit , itll show that youre capable of managing various types of credit, which will naturally bump up your credit score.
As you can see, there are various proactive things you can do to get your credit score higher and higher.
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How Credit Karma Makes Money
Credit Karma’s business model is not entirely altruistic. It is a for-profit business that makes money by giving you a free credit score in exchange for learning more about your spending habits and charging companies to serve you .
Credit Karma places advertisements in front of its users, hoping that they will respond to them by clicking on them. Many of these advertisers are lenders, and Credit Karma may earn a fee if you apply through one of its links.
Your personal data is valuable stuff to advertisers, and they pay more to target it. With more than 100 million users, this is a healthy revenue model for Credit Karma.
How Do You Minimize The Effect Of Hard Inquiries On Your Credit Score
The most important thing you can do when shopping around for a loan is to condense your search time. Credit bureaus give a two week period for inquiries to be made. If you apply for multiple loans in this period, the credit agency will consider them as one hard inquiry. This is the most important thing you can do to minimize damage from multiple hard inquiries.
In general, experts caution you to be aware of hard inquiries, but they stress that this part of your credit report is the least impactful. Missed payments and high credit balances are much more detrimental than new credit inquiries.
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What To Do When You Don’t Have A Credit Score
The average credit score is 703 in the U.S., according to Experian. If you donât know your credit score, you may not know how you compare to the average. You may also not know why itâs important to improve your score. In this article, we provide tips for how you can learn your score and what to do if you donât have one yet.
Learn More About Your Credit Score
A 700 FICO® Score is Good, but by raising your score into the Very Good range, you could qualify for lower interest rates and better borrowing terms. A great way to get started is to get your free credit report from Experian and check your credit score to find out the specific factors that impact your score the most. Read more about score ranges and what a good credit score is.
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Apply For A Store Charge Card
If you shop in-store, itâs common to be asked to sign up for a store card when you pay for your purchase. While these cards generally have higher interest rates and very low credit limits, they can be an ideal tool for building credit. Approval rates are generally higher, and these cards can sometimes come with extra perks, such as a percentage off your initial purchase or special in-store coupons.
What It Means When You Apply For A Loan
Following the guidelines below will help you maintain a good score or improve your credit score:
- Watch your . Keep below 15%25% of your total available credit.
- Pay your accounts on time and if you have to be late, don’t be more than 30 days late.
- Don’t open lots of new accounts all at once or even within a 12-month period.
- Check your credit score about six months in advance if you plan to make a major purchase, like buying a house or a car, that will require you to take out a loan. This will give you time to correct any possible errors and, if necessary, improve your score.
- If you have a bad credit score and flaws in your credit history, don’t despair. Just start making better choices and you’ll see gradual improvements in your score as the negative items in your history become older.
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