What Is a Credit Score?

Definition and Examples of Credit Scores

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A credit score is a number that evaluates and rates your creditworthiness based on your credit history. Lenders use credit scores to decide whether to approve someone for a loan or credit card, and to determine what interest rate to charge.

Other companies might use your credit score as well, for purposes of determining whether to rent you housing, offer you a job, or how much to charge you for auto insurance.

What Is a Credit Score?

A credit score is a number that falls in a range from about 300 to 850. "Good" scores are considered to be in the 600 range. You have a better chance of being approved for loans at more favorable terms when you have a higher score.

Most credit scores are generated by two major companies: FICO, which stands for Fair Isaac Corporation, and VantageScore Solutions.

FICO Score Ranges
Exceptional 800+
Very Good 740-799
Good 670-739
Fair 580-669
Poor Under 580
VantageScore Ranges
Excellent 781-850
Good 661-780
Fair 601-660
Poor 500-600
Very Poor 300-499

FICO scores are based on the Fair Isaac Corporation's scoring model. VantageScore Solutions is an independent company that owns the intellectual property rights to VantageScore. This scoring model was jointly developed by the three major credit bureaus—Experian, TransUnion, and Equifax—and they retain partial ownership of VantageScore Solutions.

How Credit Scores Work

FICO and VantageScore's scoring models enable them to generate individual credit scores using an automated process. Reading through someone's entire credit report takes some significant time, and lenders would have to spend resources doing so for every applicant if they didn’t have access to credit scores.

Someone looking at your application might also miss important details in your credit report or make errors in judgment regarding the severity of some information. Credit scores provide a far simpler way for potential lenders to determine creditworthiness.

Your credit score can change over time as you make payments and creditors provide information. Your scores can vary from month to month depending on these factors.

Scores arrived at usually vary somewhat depending on which credit bureau supplies the information. Each credit reporting agency can have slightly different data, an they're not required to share most information with each other. This can result in a higher or lower score, depending on the source material fed into the scoring model. 

Types of Credit Scores

Different types of scores can exist for various lending purposes. For example, FICO offers specialized scores for financing a vehicle, for obtaining a mortgage, and for qualifying for a credit card.

Both FICO and VantageScore are constantly refining their models, and the exact model used can have an effect on your score. FICO Score 9 is the latest version of the FICO model, although FICO Score 8 is still used more frequently. The latest version of VantageScore is VantageScore 4.0.

FICO 9 makes a distinction between unpaid medical bills and other types of debts.

How to Improve Your Credit Score

FICO and VantageScore might not share the exact details of how their models work, but they do provide guidance on which factors matter the most. Always strive to make your loan payments on time because your payment history is the most important factor in your credit score under both major models.

Credit scores are designed to predict if you’ll make payments on time, so it’s no surprise that late payments in your credit history will bring down your credit scores.

The less you owe, the less risky you are as a borrower. Your credit utilization ratio measures how much of your available credit you’re currently using. Credit scoring models penalize you if you’re using a high proportion of the credit lines that are available to you.

VantageScore recommends keeping your credit card balances below 30% of your credit limits to avoid negative impacts on your score.

Lenders are likely to believe that you’ll continue this type of behavior if you have a long track record of successful borrowing and repaying. The length of your credit history is based on a number of factors, including the ages of your oldest and newest accounts and the average age of all your accounts.

Be careful about closing credit card accounts for any reason, especially your oldest one. Closing accounts can affect both your credit utilization ratio and the average age of your accounts.

It can be worth it to keep a credit card active by making a small purchase every month or so, such as a tank of gas, as long as having it available doesn’t tempt you to rack up debt and the card doesn’t have an annual fee.

Scoring models consider what types of loans you’re using or have used in the past, including credit cards, auto loans, and home loans. Lenders like to see that you can handle a mix of different types of loans, so consider diversifying if you can safely do so.

Don’t apply for new loans for the sole reason of improving your credit mix. The costs of debt outweigh any benefit you’d get from increasing your mix, which is one of the least important factors in your credit score.

Opening several new credit accounts in a relatively short period of time can signal that you're facing financial difficulties and are a riskier borrower. The fewer recent credit inquiries you have, the better.

How Can I Check My Credit Score?

It’s easy to review your credit scores, although you might have to pay a fee. Experian offered a free FICO score and credit report in June 2020, as well as a free credit report, if you created an account with the company. Equifax was charging $15.95 for a report and a score at that time, and TransUnion was offering unlimited score and report access plus credit monitoring for $24.95 a month.

You can view your credit reports for free each year under federal law, but credit bureaus aren't required to provide free credit scores.

You might be able to get your credit scores from other sources as well:

  • Credit card issuers sometimes provide free credit scores to their customers. Ask your current credit card companies whether they offer them.
  • You can ask the lender about your score during the application process when you apply for a loan.
  • VantageScore maintains a list of partner sites that sometimes offer free access to your score.
  • You can purchase FICO credit scores on the FICO website.

Your credit score depends on the information in your credit report, so your report might actually be more important. Get your credit reports from each reporting agency, review the information, and fix any errors to be sure that your score accurately reflects your borrowing history.

Key Takeaways

  • Your credit score is a three-digit number calculated from the information contained in your credit report.
  • Most scores range from about 350 to 800, and a score in the 600-range is considered “good,” if not excellent.
  • Most credit scores are calculated by FICO and VantageScore.
  • A higher score means greater borrowing power and results in better interest rates. 

Article Sources

  1. USA.gov. "Credit Reports and Scores." Accessed Sept. 28, 2020.

  2. ConsumerReports.org. "12 Ways to Fix Your Credit Score." Accessed Sept. 28, 2020.

  3. FICO. "FICO® Score 9 Now Available to Consumers at myFICO.com." Accessed Sept. 28, 2020.

  4. VantageScore Solutions. "What Influences Your Score." Accessed Sept. 28, 2020.

  5. Federal Trade Commission. "Free Credit Reports." Accessed Sept. 28, 2020.