The complete credit score guide

Feb 07, 2021
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You may have heard the term “credit score,” but are unsure of what it really means. We’re here to help you make sense of it all. Since your credit score is an important part of your financial health, we’ll go through it step by step to help you better understand what it means and its impact.

In general, your credit score is a culmination of the following factors:

  • Number of accounts you have
  • Types of accounts
  • Your used credit vs. your available credit
  • Length of your credit history
  • Your payment history

These indicate to lenders your creditworthiness, or your ability to make payments on time. The more diligent you’ve been to make payments promptly and keep debt under control will result in a higher credit score. Conversely, late payments or default on loans will cause a significant drop in your score.

There are three major credit bureaus responsible for generating credit reports – Equifax*, Experian*, and TransUnion*. Other companies, like Fair Isaac Corporation (FICO)* and VantageScore*, review your credit report, evaluate your credit risk level, and assign a numerical score based on these factors.

Your FICO score is comprised of information from five categories: payment history, total debt, credit history, credit mix, and new accounts and requests. FICO scores range from 300 on the low end to 850 on the high end.

So, what is a good FICO score? It depends. myfico.com says the following:

  • Exceptional 800+
  • Very Good 749-799
  • Good 670-739
  • Fair 580-669
  • Poor below 580

Payment history has the biggest impact on your credit score, making up 35% you total FICO score. Consistently paying down your balance on time is the single most important thing you can do to show your creditworthiness to lenders.

Total debt makes up 30% of your score. Maxing out credit cards, having too many credit cards, or taking out too many loans will affect this section of your credit score. Creditors look at your ability to pay and your established credit history. They also look at how much credit you’ve used out of the total credit extended to you.

To figure out your total debt, divide your credit card balances by the card limits and multiply by 100. Try to keep your balances at 30% of the limit or below to avoid negatively impacting your score.

Your credit mix makes up 10% of your score. This indicates the type of credit you have, from unsecured credit cards to installment car loans. Creditors want to see that you can make payments on different kinds of credit. It’s best to have a mix of revolving loans and accounts.

Your credit history contributes 15% to your overall credit score. The longer you have an established history, the better off you are. If you have a strong, positive credit history, a small setback won’t impact your credit as much once you clear it up.

Negative status items such as late payments, bankruptcies, and collection accounts will be reflected on your credit report for 7 years before being dropped.

This section comprises 10% of your score. Frequent inquiries regarding new accounts can have a negative effect on your credit. Most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on your credit score.

Your VantageScore is based the following factors: payment history, credit age and mix, credit utilization, balances, recent credit card applications, and available credit.

Here’s a breakdown of VantageScore:

  • Excellent 781-850
  • Good 661-780
  • Fair 601-660
  • Poor 500-600
  • Very Poor 300-499

Like FICO, payment history has the biggest impact on your VantageScore, comprising 40% of your total score. Paying down your balance on time is the most important factor.

VantageScore combines credit age and mix, and it makes up 21% of your total score. This segment looks at the different types of credit you have and how long you’ve had those lines of credit. Similar to FICO, they want to see that you can make payments on different kinds of credit over a long period of time.

Credit utilization is 20% of your VantageScore, which shows you are using a small percentage of your available credit. To determine your credit utilization, add up the total of all credit balances and divide by the total of all credit limits. The less available credit used makes for a better score.

11% of your VantageScore looks at the total balances on all your credit accounts. Lenders like to see low balances.

Recent activity in credit accounts is 5% of your VantageScore. Recent credit card applications or personal loan requests are considered credit requests and may have a negative effect on your credit.

At 3%, available credit is the smallest portion of your VantageScore. This lets lenders know that you are only taking out credit that you need.

It’s a good idea to keep an eye on your credit score and review every few months. You can get a free credit report once a year from AnnualCreditReport.com. Take advantage of this free service to ensure the information on your credit report is accurate and up to date.

There are also credit monitoring companies that will monitor your credit for a monthly fee. They will notify you of any suspicious activity they discover, and you can typically get your credit score at any time as part of this service.

When you apply for a credit card or a loan, the lending company will pull your credit report to see if you’re a good candidate for the loan or credit offer. Your interest rate may vary depending on your credit score. While your credit score may only be part of the lender’s criteria, it’s a crucial component. Look for opportunities to prove yourself and make your payments promptly to build a positive credit history.

Not only do mortgage lenders, banks, and credit card companies review your credit score, but landlords, cell-phone companies, and employers may also look at your credit history.

Strong credit scores result in better financing options. If you’re looking to improve your credit score, here are a few tips:

  1. Get current on missed payments
  2. Make payments on time
  3. Pay delinquent accounts as soon as possible
  4. Keep unused credit card accounts open
  5. Never skip payments
  6. Work with your creditors on payment options and terms
  7. Keep your balances low
  8. Zero out debts instead of transferring them to another creditor
  9. Apply for credit or loans only when necessary
  10. Review your credit report on a regular basis and challenge incorrect items

Your credit score is a vital piece of your overall financial health. In many ways, it can affect your daily life. By understanding how the score is calculated and its various components, you can build and grow your credit with confidence.

The content of this article is for informational purposes only and should not be construed as personalized legal, financial, or other advice. This article represents paid promotional material provided by or on behalf of Snap Finance, LLC, or its affiliates.
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