In the past, you were probably obsessed with your SAT score, and today you may be curious about your Uber score. But there is another number that should catch his attention. It’s one that will follow him throughout his adult life and could mean the difference of tens of thousands of dollars over his lifetime: his credit score.
Although it seems unfair to reduce all your financial habits to a “number“Your credit score basically sums up how lenders view your financial health and your ability to repay a loan into a single number. So if you want the best rates and the most loan options, you’ll want to make sure your credit score is excellent. Here’s more information about what a credit score is and how lenders use it to make decisions.
What is credit score?
A credit score is the three-digit number that lenders use to determine how safe it will be to lend you money. The only way they can determine if you are risk-worthy is to see how you have handled credit in the past and assume you will do the same with any new loan you apply for. Therefore, the higher your credit score, the better, as lenders will be more willing to extend credit because you have proven that you can pay it back responsibly.
But the whole world doesn’t march at the same pace…there are actually two main types of credit scores. The FICO Score was created in 1989 by the data analysis company Fair Isaac Corporation to introduce an industry standard: FICO. Then in 2006, VantageScore launched by the three nationally recognized credit bureaus, Equifax, Experian and Transunion to compete with FICO.
That means you have more than one credit score you need to consider. And although FICO claims that more than 90 percent of the top 100 largest lenders use its score, which can make it seem like the one to watch, There are even different types of FICO scores. For example, a credit card company is more likely to use a FICO Bankcard Score, while an auto lender will use a FICO Auto Score. These special subsets create different versions of your credit score ranging from 250 to 900 and further weight your specific behavior for that category; That is, your past auto loan history will be a higher factor in your FICO Auto Score than in your regular FICO score.
There are also a number of iterations of your base FICO score, as Fair Isaac Corporation frequently modifies its formula to adapt to updated standards. The most recent version of your base FICO Score, the FICO Score 9, is currently being implemented but has not yet been adopted by all lenders. In an example of how FICO Score 9 differs, reported rental history can improve your credit score and unpaid medical collections have a less negative effect than in previous versions. Mortgage companies are likely to use older versions of the FICO score, since a mortgage is a big-ticket item, they are a little less risk averse, and older scores are more conservative.
Similarly, VantageScore has released four versions over its lifetime; the last one is Vantage Score 4.0. This iteration considers your “historical” credit utilization rate (the others only look at your current situation) and gives a little less weight to a tax lien or judgment.
How do I know what score to track and how can I improve it?
We load you with a lot of background information, but don’t worry… not everything will be on the test. Because even though the formulas for calculating your credit scores vary slightly, they all use essentially the same information, albeit with slight adjustments. That means good credit habits are good credit habits across the board and will help keep your credit scores glowing.
This is how FICO and VantageScore describe the weight of various factors they are considering.
FICO uses the following model to determine your credit score:
Payment history (35 percent)
Have you made all your payments? Were they on time? You can see that is the most important factor, so don’t pass it up!
Credit utilization (30 percent)
¿How much credit do you have and how much are you using?? In general, it is best that Keep your balances below 30 percent of your available credit. That means if your credit card has a limit of $2,000, avoid charging more than $600, even if you pay it off. It’s important to mention that this item is related to “revolving credit,” which includes lines of credit and credit cards, rather than “installment” loans, which are fixed-amount loans, such as student or mortgage loans. Those will have a fixed monthly payment.
Length of credit history (15 percent)
How long have you maintained credit? Since age matters, don’t close old accounts, even if they offer you a more attractive credit card that you use most of the time.
Credit mix (10 percent)
What different types of credit accounts do you have, such as credit cards, mortgages, auto loans, or student loans? Don’t take out loans just to have them, but don’t worry if you have a few different types, assuming you’re paying your bills on time.
New credit (10 percent)
How often have you applied for more credit cards or loans? Too many credit inquiries can make a lender wonder if you’re about to go on a spending binge.
In comparison, VantageScore tells us how influential various factors are, rather than providing a percentage breakdown. Here is a general guide:
Payment history (extremely influential)
Just like with FICO, this is your #1 path to a great VantageScore. Pay those bills on time.
Age and type of credit (very influential)
This basically combines the FICO categories of “length of credit history” and “credit mix” into one group.
Percentage of credit limit used (very influential)
This is similar to FICO’s “credit utilization.”
Total balances/debts (moderately influential)
This will reward you when you keep your debt levels low, even if you are making payments.
Recent credit behavior (less influential)
Like FICO’s “new credit,” this takes into account how many loans or credit cards you’ve applied for recently, since you could theoretically owe a lot if you used them all at once.
Available credit (less influential)
Even if you have a lot of credit available, use only what you need.
Since the credit bureaus explain in detail what they are looking for, you have an excellent opportunity to polish your credit score by evaluating your weaknesses and taking steps to improve those areas, as mentioned above.
What is a good credit score anyway?
You probably asked that about your SAT and the answer was, “It’s relative.” That’s because a score that was solid local college material wouldn’t cut it at an Ivy League school. But when you ask if your Uber rating is good, the answer is more consistent. Your number should probably be between 4.5 and 4.9 if you want to be fairly confident that a driver will come back to pick you up.
Credit scores are the same way; While there is a range that is acceptable, you want to aim for the top. FICO has shared its scale to help you evaluate the health of your credit score.
| Exceptional | 800+ |
| Very good | 740 to 799 |
| Well | 670 to 739 |
| fair | 580 to 669 |
| Poor | 579 and below |
That’s not to say that the best rates are only reserved for those “exceptional” people, but in general, you’ll want to hit the “good” to “very good” categories. And for some types of mortgages, there are certain numbers you must reach to be considered.
For example, to qualify for most mortgages In the United States, you must have a minimum credit score of 620 for a fixed-rate loan and 640 for an adjustable-rate mortgage, and even then lenders are likely to offer more attractive rates the higher your credit score. And for an FHA loan, you can make a much smaller down payment if your score is higher: Consider that with a 580+ you only need to pay 3.5%, but that amount increases to 10% if your credit score is between 500 and 579; and you are not eligible at all below 500. In fact, that is a perfect illustration of how a lower credit score can make a lender feel less confident that you might be a good risk to pay them back and , therefore, requires more in the form of collateral.
How can I find out my credit score?
So now that you know everything that goes into a credit score, you’re probably wondering how you can find your own number. There are a variety of places you can get your credit score – check with your credit card company or bank to see if it’s a service they offer. You should also check your credit report, which will give you a status update on how well you’re doing. They are available free of charge once a year at each of the three national credit bureaus in the Credit.com Annual Report.
Know your credit score, and how to improve it, is a key step in the important journey of financial health. AND improve your scoreeven a little, can save you a lot of money on interest if you need to borrow money.