What is a credit score?
A credit score is the adult version of your grade point average (GPA) in school; it is how banks and lenders judge your ability to be responsible with credit and pay back loans. Similar to how colleges and universities used your GPA to judge your ability to do well and succeed at their school, your credit score demonstrates your overall creditworthiness.
Five things are taken into account to determine your credit score. However, they are all weighted differently. Meaning certain things will have a bigger impact on your credit score than others.
Your credit score is determined by looking at your payment history, credit utilization, credit mix, new credit, and age of credit.
Payment history takes into account your ability to make required payments on time as well as any negative marks included on your credit report. For example, a negative mark would be when debt is sent to collection agencies or if you filed for bankruptcy. Payment history has the highest impact on your credit score, it is weighted at about 35%.
If you are late with a payment, the later your payment, the worse it is. So it’s better to be one day late (which may not even be reported as late depending on the company) than it is to be 30 or 60 days late. Additionally, the more time that has passed since you made a late payment, the less of an impact it will have.
For example, even if you cannot pay a credit card off in full each month, you need to at least make the minimum payment on time to maintain a good payment history. However, if when you were younger, you weren't great about making all your payments on time, you can't change the past. The good news is that the further away those old late payments are, the less they matter. If you've had a perfect payment history since then, keep it up, and your credit score will thank you.
How much of the credit available to you are you using? An example would be how much of your available credit on a personal credit card you are using. The ratio between your credit limit and your balance demonstrates your credit utilization. Credit utilization has a great impact on your credit score, accounting for about 30% of your score.
For example, if you have a credit limit of $10,000 and you regularly carry a balance of $3,500 you would have a 35% credit utilization. However, for the best credit score possible you would want to aim for a credit utilization under 30%–the lower, the better. A lower utilization demonstrates you manage your money and credit well.
If you have tons of student loan debt, don’t worry too much. While student loans will impact your overall debt to income ratio, credit utilization is focused on revolving debt such as credit cards. Student loans are an example of installments loans–further discussed in the next section.
Credit mix is referring to the different types of credit you have. Being able to show that you are good at managing different kinds of credit helps show you are a responsible borrower–making you a desirable customer for a lender. Ideally, you will have a mix of revolving credit and installment loans.
Revolving credit refers to an account where you can make a payment less than the full balance due and carry some amount over to the next month. In contrast, installment loans are different. With a credit card, you determine how much you charge each month. An installment loan is a debt that is paid back over time.
Types of Revolving Credit:
- Credit Cards
- Home Equity Lines of Credit
Types of Installment Loans:
- Student Loans
- Auto Loans
- Unsecured Installment Loans
This might be the only time you are thankful for student loans. Simply having a credit card and a student loan provides you with a good mix of credit. If you never took out student loans, then you might not see any mix in credit unless you have taken out some other installment loan such as a car loan or a mortgage.
New Credit / Hard Credit Checks
People do not like to loan money to someone that seems to be asking everyone for money. It makes it seem like that person is desperate. This makes lenders wary as it makes it appear that a borrower might struggle to pay back a loan.
Every time you apply to open a new line of credit, a lender checks your credit. In other words, they request a copy of your credit report and credit score resulting in a “hard check” on your credit. Ideally, you want to keep the number of “hard checks” on your credit low.
If you are looking at opening a new line of credit, you will probably want to make sure you are getting the best rate. Everyone likes to shop around to get the best deal which is why multiple credit checks made for mortgage loans within a 45-day period are counted as just one credit check.
Credit checks will ultimately impact your credit score only by a few points as they account for about 10% of your score. However, ten hard credit checks in a year, even if they each only impact your score by a handful of points can add up quickly. So you’ll want to be mindful about how many hard checks on your credit are being requested.
Hard vs. Soft Credit Check
Now you may be thinking that you can't check your credit score for fear of having it impact your score. However, checking your credit score is considered a soft inquiry. It does not show up on your credit report and has no impact on your credit score. A hard check on your credit or hard inquiry only occurs when a lender uses it to decide whether to lend you money.
Again, you can minimize the impact of hard credit checks specifically for mortgage loans by limiting your rate shopping to a 45-day period. (The 45-day rule applies only to credit checks from mortgage lenders or brokers – credit card and other inquiries are processed separately.)
Age of Credit
Age of credit looks at the average age of all your accounts. The more accounts you have that were opened recently, the lower your average age of accounts will be. The age of your credit counts for about 15% of your credit score.
What is the difference between a credit score and a credit report?
Just as a credit score is like a grown-up grade point average, your credit report is like your report card; it has information on every line of credit you have or had in the last 7-10 years. It notes on time payments, outstanding balances, who owns the loan or line of credit, negative marks, and any paid off loans as well.
Credit Score: the number that defines your creditworthiness, it is derived from information contained in your credit report.
Credit Report: includes identifying information as well as information about your various lines of credit, inquiries on the account, and any collection items.
Why are there three credit scores?
Unlike in school where you have just one report card leading to a single GPA, there are three different nationwide credit reporting agencies often called credit bureaus: TransUnion, Equifax, and Experian. They each have a credit report on you. However, your report can vary between the different credit reporting agencies, which is why you can have three different credit scores or more.
TransUnion, Equifax, and Experian Scores
Why might they vary? The financial companies that own your loans or lines of credit may not send the information to every credit reporting agency at the same time, if at all. Because they are using different information and different methods to calculate a credit score, you end up with three credit scores, one from each agency.
These credit reporting agencies will have their own generic credit score that they will calculate based on your credit report. These credit scores are known as the Equifax Credit Score, the Experian Plus Score, and the TransRisk New Account Score. They are different from the more commonly referred to FICO credit score and VantageScore.
Each credit reporting agency also scores with a different range. The TransUnion New Account Score ranges from 300-850. The Experian Plus Score ranges from 330-830, and the Equifax Credit Score ranges from 280-850.
The Experian Plus Score, TransRisk New Account Score and Equifax Credit Score are known as educational scores because they typically aren’t used by lenders to determine creditworthiness. They are mostly used for personal education. For example, if you check your credit score on Credit Karma, you’ll see your TransRisk New Account Score and the Equifax credit score. They will give you an idea of your creditworthiness, but they are unlikely to match your FICO or Vantage credit score.
FICO Credit Score and VantageScore
FICO stands for Fair Isaac Corporation, the company that produces the FICO score and is the most well-known credit score. FICO scores range from 300 to 850. However, because information can vary from one credit reporting agency to the next, you could also see variations in your FICO Score.
The VantageScore calculates the score the same way for each of the credit reporting agencies. Meaning if the information is the same at each of the credit reporting agencies then your VantageScore will be the same no matter what credit reporting agency is used to determine the score. The scores range from 501-990.
There are a few major differences between the FICO and the VantageScore:
- VantageScore ignores paid collection accounts. Your FICO 8 score is likely to increase if you pay a collection account but your VantageScore is not. FICO 9 handles paid collections the same as VantageScore, but this FICO score isn’t as widely used.
- VantageScore weighs late mortgage payments more heavily than FICO.
- VantageScore makes allowances for natural disasters.
- VantageScore takes utilities and rent payments into consideration.
The fact is that the credit score you see, whether it is through a credit card you have, websites like Credit Karma or Credit Sesame, or ordering your credit score through one of the credit reporting agencies, will likely never be the same score that a lender sees. All your credit scores should be within a few points of each other though.
This is not only because of how and when the information gets to different credit reporting agencies, but also because they each use their own algorithms to calculate the score they give you that differs from scores they give financial institutions.
Why FICO is the most commonly used score
If you’re planning on making a financial move, like applying for a mortgage or moving to a new apartment, you’ll want to check your FICO score. An estimated 90% of lenders check your FICO score before they make their decision.
The FICO score was first introduced in 1989 as a model for determining your creditworthiness based on data from all three credit bureaus. Because of its long-standing history, the FICO score is well respected. The VantageScore seems to be gaining in popularity, but we’re still seeing the majority of lenders, employers and insurance companies rely on the FICO score.
There are more than 60 types of FICO credit score with each type giving more weight to various creditworthy characteristics. The formulas are similar, so you shouldn’t see much variation among the different scores. Still, FICO 8 is currently the most commonly used score across the board.
Is a 773 credit score good?
If you are talking about FICO scores, then yes, generally speaking, a 773 credit score is very good. According to Experian, FICO scores above 670 are considered good. Experian breaks down the FICO scores from very poor to excellent, outlined below as follows:
Credit Score Categories
|800 – 850||Excellent|
|740 – 799||Very Good|
|670 – 739||Good|
|580 – 669||Fair|
|300 – 579||Very Poor|
How do I find out my credit score?
While there are lots of different credit scores, you can get an idea of where your creditworthiness stands by obtaining one of your credit scores. You can order a credit score from any of the credit reporting agencies, each of which are required to provide you with a free copy of your credit report once every 12 months.
Why Your Credit Score Matters
Just like a GPA helps colleges decide if an applicant will do well, your credit score helps financial institutions determine if you are likely to repay the line of credit they are considering offering to you.
A strong GPA can often lead to scholarships. A good credit score not only gives you more options regarding which lenders to work with when getting new lines of credit, but also gives you more favorable terms on credit–often in the form of a lower interest rate and perhaps access to other rewards.
For example, a better credit score resulting in a 3% interest rate rather than a 6% interest rate on a $15,000 ten-year loan can save you over $2,600 in interest and will result in a monthly payment of $144 instead of $166. You'll save money both in the short and long term because you got a better interest rate.
How to Improve Your Credit Score
If your credit score is standing as a financial roadblock, there are actions you can take to improve it. Not all actions are created equal. Because certain factors weigh more heavily in determining your credit score, certain actions can have a bigger impact in improving your credit score.
To get the biggest bang for your buck focus on improving your credit utilization and payment history. Then do what you can to improve on hard checks on your credit, age of credit, and your credit mix.
How to Improve Credit Utilization
There are two ways to improve your credit utilization. The first is to pay down your debt. The second is to raise your line of credit. However, if having a larger line of credit available to you is going to induce you to spend more, then you should likely avoid increasing your credit line.
Pay Off Debt
There are lots of ways you can approach paying off debt. The two most common would be the debt avalanche and the debt snowball. With the debt avalanche, you focus on paying off your debt based on the highest interest rate first. With the debt snowball, you pay off the lowest balance first and work your way up. With each of these methods, you should roll the payment from any paid off debt to the next debt payment.
If you are already stretched thin and do not have extra income to contribute to your debt payoff strategy, then consider picking up a side hustle to earn extra money or focus on budgeting and cutting back.
Increase Your Credit Line
You may find as you pay off debt, your credit card company or lender automatically increases your credit line. If not, you can submit a request to have your credit line increased. Keep in mind that this may result in a hard check on your credit, so only do this after you have been good about making on-time payments and have made some progress on paying off your debt.
Always pay your bills on time. But if you missed one once, don’t stress about it, focus on making on-time payments from now on. Remember, the longer it’s been since a late payment, the less it impacts your score. If there are ever errors on your credit report stating you made a late payment when you did not, then you should take action to have that corrected. You ought to consider using companies like Credit Karma, Credit Sesame, or myFICO to monitor your credit for alerts and changes.
Don’t take on debt just to increase your credit mix. Be mindful of the credit and debt you have. It’s better to pay off your credit card debt to improve your debt utilization. When it comes to auto loans and other installment loans, there isn't as much pressure. Though if you want to pay off your installment loans faster, it won’t impact your credit mix. Credit information stays on your report for seven years.
Hard Credit Checks
If you are shopping around for mortgage loans, keep it to a two-week period, and it will only count as one hard check. For other types of credit, don’t make a habit of requesting new lines of credit throughout the year. In addition, try narrowing the loan companies you might want to work with before approving any hard credit checks on you.
Age of Credit
Opening any new lines of credit will bring the average age of your credit down. While it’s ok to open new accounts for whatever reason (switching banks, opening/closing credit cards) don’t open a bunch of accounts just to try and create more of a credit mix or impact other factors that go into your credit score. Also, try to ensure older accounts remain active as they help to increase the average age of your credit.
Correct Errors on Your Credit Report
If there are any errors on your credit report, it’s important you take action to get them corrected. This can be a process but depending on the error, fixing it can result in a much better credit score. To have an error corrected, contact the credit reporting agency and ask for it to be corrected. The credit reporting agency then has 30-45 days to investigate. If they find there was an error, they are required to fix it for free.
Tips to Maintain Your Credit
- Check your credit report every three months, by obtaining a free credit report from each of the credit reporting agencies. Or you can make things easier for yourself by signing up with myFICO.
- Be mindful when opening up new lines of credit.
- Use tools like Credit Sesame or Credit Karma to obtain a free FICO score to monitor any major changes.