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In this article we’ll unpack the mysteries of Credit Scores and explain what they are, how they change, and TIPs on how to improve your score as part of a healthy financial life.
Credit scores are provided by three major credit bureaus – Equifax, Experian, and TransUnion. Credit scores may vary between them as not all lenders and creditors report information to all three major credit bureaus. While many do, others may report to two, one or none at all. In addition, the credit scoring models among the three major credit bureaus are different.
There are several credit scores but we’ll focus on the top two used. The most popular credit score used by companies is by far the FICO® score, named after founders Bill Fair and Earl Isaac in 1956. FICO® credit scores are used by 90%+ of companies so it is wise to focus on this score. There is also the VantageScore which was created by the three major credit bureaus.
The two scores are similar but do have differences. Knowing your score is very helpful when applying for new credit. If a lender requires a certain range of score you want to know this before having them do a ‘hard pull’ on your credit. Credit scores are meant to be a simple way for lenders to determine creditworthiness when lending money.
First we’ll look at FICO® scores as this is the most common score used by lenders. The version of FICO® below is FICO® Score 8. This is the version used by most auto lenders and credit card issuers. There are different versions used for speciality lending but below is the most common.
FICO® Credit Scoring
You can get your FICO® score free directly from the Fair Isaac Company here YOUR FICO SCORE (FREE).
What are FICO® score ranges?
| FICO® credit score ranges | |
| Excellent credit | 800 – 850 |
| Very good credit | 740 – 799 |
| Good credit | 670 – 739 |
| Fair credit | 580 – 669 |
| Poor credit | 300 – 579 |
FICO® scores are calculated based upon the following mix:
35% Payment History
This is simply consistently paying your bills on time. Late payments have a negative affect on your score.
30% Credit Utilization
This is the amount of credit you’ve used out of your revolving credit lines (i.e. credit cards total limits). If you have using 90% of your credit line, then your score will be negatively affected. Try to keep this to 30% or lower.
15% Credit History
How long you’ve held credit accounts makes up 15% of your score. The longer you’ve had credit, the higher your score will be.
10% Credit Mix
What types of credit you have i.e. revolving vs installment accounts. Credit cards are revolving accounts. Installment accounts include car loans, student loans, and mortgages. Having a good mix of revolving and installment adds to your score here. Having a very high proportion of revolving credit cards with high utilization can have a very negative affect on your credit. TIP is to move credit you can’t pay off in the short term to an installment line. This will reduce your interest rate, allow you to pay it off quicker, and improve your credit score.
10% New Credit
Lastly the number of new accounts you’ve opened recently and the number of times you have hard credit inquires. TIP – space out new credit accounts and be very wary of anyone running a hard credit pull on your credit. There are lots of alternatives that pull just soft credit which does NOT affect your score.
VantageScore®
The other popular credit scoring model used is VantageScore. This scoring model was created through collaboration by Equifax, Experian, and TransUnion. 9 of the 10 largest banks, 2,600+ Financial Institutions, and 43 of the 100 largest credit unions in the US use VantageScores. The version of VantageScores® below is 3.0. There is a newer version 4.0 that hasn’t been fully adopted yet by most financial institutions. The difference between the two versions is in the % mix. VantageScore® 3.0 below is the most common currently in February of 2023.
You can get your VantageScore® free from a number of sources through this link YOUR VantageScore® (FREE).
What are VantageScore® ranges?
| VantageScore Ranges | |
| Superprime | 781 – 850 |
| Prime | 661 – 780 |
| Near Prime | 601 – 660 |
| Subprime | 300 – 600 |
| Poor credit | 300 – 579 |
VantageScores® are calculated based upon the following mix:
40% Payment History
This is simply consistently paying your bills on time. Late payments have a negative affect on your score. VantageScore® puts a little bit more emphasis on this compared to FICO®‘s 35%. The later the payment and the more late payments you have, the more serious the impact on your VantageScore.
21% Depth of Credit
Depth of credit looks at the age of your credit accounts. This includes your average, oldest, and youngest account age. Older account ages help your VantageScore because they give lenders a longer-term view of how you manage your money. This helps them make more educated decisions about whether or not to lend to you. The depth of credit category also looks at the type of credit accounts you use, installment and revolving. Tip: Showing that you can successfully handle both types of credit will boost your score more than just having a single type of credit on your reports.
20% Credit Utilization
Credit utilization looks at how much credit you use and how much you have access to. It takes into account your balances on installment loans, but focuses more on your revolving credit. Again, try to keep this under 30% for a better score. A high credit utilization ratio indicates a heavy reliance on credit and suggests that you might be living beyond your means. Credit utilization looks at how much credit you use and how much you have access to. It takes into account your balances on installment loans, but focuses more on your revolving credit.
11% Balances
The balances category looks at the total balances remaining on all of your credit accounts, both current and delinquent. High balances can hurt your score, even if you’re current on all of your payments.
5% Recent Credit
This reflects the number of credit accounts you’ve recently opened and the number of hard inquiries showing on your report. If you are buying a car and have multiple hard inquiries with several lenders over a short time, have no worries as VantageScore considers all hard inquiries that take place in a 14-day period as a single inquiry. So, if you are going to take a loan out for a car, be sure not to space out inquires past the 14-days as this will lower your score. Better to have all the hard inquiries take place during the 14-day window.
3% Available Credit
The final category is available credit. This category looks at how much credit you have available on your revolving credit accounts. This doesn’t have a huge effect on your score but having a larger amount of available credit can raise your score slightly.
