Credit is confusing. Whether it’s reading your credit report or understanding your credit score range, it can be simply overwhelming.
That’s why we want to help explain some things about credit scores. In this guide, we’ll cover credit in general, what affects your score, the different credit score ranges, and how this all plays into your daily life.
What Is Credit?
Credit is borrowing money so you can purchase something while promising to pay that money back. You could also think of it as the ability for you to borrow money.
Usually, borrowed money comes from a bank or some sort of financial company. You then pay that money back over an amount of time agreed upon by both parties.
But credit isn’t without a cost. Creditors (lenders) charge a fee, also known as interest, on top of the money you pay back. You typically pay back the money in monthly installments, and each payment has a finance charge (interest) included.
So how can lenders know you’re reliable and will be able to pay back the money? They’ll look at your credit score.
What Impacts Your Credit Score And What Doesn't?
A credit score is a three-digit number, and it gives lenders an idea of your creditworthiness. To even have a credit score, you first need at least one loan or credit card open for at least six months, and that has been reported to at least one credit bureau.
Knowing what your score is and what affects it are crucial to your financial health. Sometimes, a few points added to or lost from your score can make a big difference.
There are several things that can determine if you have a good credit score or a bad one. These include payment history, outstanding debt, credit mix, credit age, and credit inquiries.
Accounts for 40 percent of your credit score
Did you know that a single 30-day late payment stays on your credit report for seven whole years? That fact quickly helps you realize how important on-time payments are.
One missed payment that’s 30 days late can drop your credit score 90 to 110 points. Recovering from that can take about a year, depending on how vigilant you are to improve your score.
And the later your payment gets, the worse it hurts your credit. If your loan goes 120 days past due, it’s considered a “default.” A default really punches your credit score in the gut, and it usually means the lender will send your account to a collections agency.
Additionally, if a credit card is 180 days late, it’s typically charged off. A charge-off looks terrible on your credit report.
And, sadly, you can’t just remove a late payment from your credit report, unless it happened because of error and you can prove it.
You can ask the creditor if they’re willing to work with you and not report a late payment to the credit bureaus, but this is usually reserved for those who have never missed a payment.
Accounts for 35 percent of your credit score
The more unpaid debt you have on your record, the worse it is for your credit score. And it’s not just the total amount you owe among all of your debts; it matters how much of that credit is being used.
So your credit score can be negatively affected by the ratio of your balance owed on a credit card compared to the original credit limit.
The more debt you have overall, the more difficult it will be to keep your credit score up, which means it will be harder to get future loans.
Accounts for 10 percent of your credit score
Sometimes age gets a bad wrap – people are dying to stay young.
But this isn’t the case with debt. The older your debt, the better you look to a creditor. If you’ve kept your debts in good standing for many years, that can boost your credit score. It shows lenders you can handle your debt well in the long-run.
It shows you have experience with debt, meaning it will most likely be more profitable for a lender.
Accounts for 10 percent of your credit score
This is exactly what it sounds like – it’s better to have a mix of different types of loans. Having a combination of, say, a credit card, an auto loan, and a mortgage is good for your overall credit score.
If you feel like you need a new loan for something, explore the lending options that you haven’t before. As long as you can make your payments on time, it could help your credit score. Now, that doesn’t mean you should go out and apply for every type of loan possible.
The more loans you apply for, the more it could hurt your credit.
Accounts for 5 percent of your credit score
A credit inquiry is not checking your credit score. Checking your credit score or report does not hurt your score.
What we mean by credit score is applying for a loan. If you’re shopping around for the best rate, you may need to apply for a couple of loans to see the exact rate you end up getting based on your specific situation.
But be careful, doing a lot of these in a short amount of time can hurt your score.
There are two types of credit inquiries: a soft credit inquiry and a hard credit inquiry. A soft check is when, for example, a potential employer does a background check on you. Other types of soft inquiries are getting pre-qualified for a mortgage or checking your own credit.
A hard check is when a potential lender looks up your credit report, and this happens when you apply for a loan. They want to see if it’s worth it to lend you money. This hard inquiry can slightly affect your score, but only a little. It will, however, stay on your credit report for two years.
Lenders Look At More Than Your Credit Score
And that leads us to the topic of “everything besides credit scores.” When you try to borrow money, the creditor will look at more than just your score, even though that is a huge part of your creditworthiness. Basically, a good score doesn’t guarantee a good loan (or an approved loan at all).
Even if you have good credit, creditors will also look at factors like:
- Debt-to-income ratio
- Reported delinquencies on your report
- The number of hard inquiries you have
- How much you use your credit cards
- Your entire available credit history
So as you can see, credit score, although crucial, is not the only thing to focus on improving.
The Same Scores Might Mean Different Things
Before we take a look at the different credit-scoring models, we should note that each model has different scoring criteria. So if you two different models are saying you have the same score, that could mean two very different things.
For example, a VantageScore of 660 could be considered “excellent” while a FICO score of 660 may only be considered “fair.” Even further, each creditor can set their own ranges for what is “excellent” or “fair.”
Even so, it’s good to know generally in what range your score lands.
You’ve heard of the three main credit bureaus: Experian, TransUnion, and Equifax. Well, VantageScore is essentially a combination of those three. The three bureaus teamed up over a decade ago to create VantageScore, so it may be the most accurate scoring model out there.
Here’s how VantageScore 3.0 and 4.0 ranges typically breakdown, with the average score in 2020 being 675):
- 810 – 850 = EXCELLENT
- 750 – 809 = GREAT
- 670 – 749 = GOOD
- 560 – 669 = FAIR
- 500 – 559 = POOR
- 300 – 499 = VERY POOR
FICO Score Ranges
The Fair Isaac Corporations (FICO) model started back in 1960 and is still the most popular among creditors in the United States. This is separate from Experian, TransUnion, and Equifax.
In order to have a FICO Score requires you to have at least six months of credit history and at least one loan account on your report (they can be the same loan account).
You also can’t have any “deceased” flag on your report, meaning if you have a joint account holder who has passed away, you may have to close that account and open a new one before getting a FICO score generated.
Here’s how FICO Score ranges typically breakdown, with the average score as of April 2020 being 704):
- 800 – 850 = EXCELLENT
- 740 – 799 = VERY GOOD
- 670 – 739 = GOOD
- 580 – 669 = FAIR
- 300 – 579 = POOR
FICO Score vs. VantageScore
More and more lenders are starting to look at your VantageScore range rather than the leading model, FICO. Many lenders may even look at both because both models use a lot of the same information.
The main reason VantageScore may be the best way of checking your credit report is that it’s a joint venture between the three main credit bureaus. Therefore, it may be more accurate and comprehensive than FICO scoring.
TransUnion Credit Score Range
TransUnion was founded in 1968 and now uses a scoring model that ranges between 300 and 850. They actually use a scoring system called a TransUnion New Account Score 2.0 (formerly TransRisk Score). It’s designed to help creditors know how likely you are to default in the following 90 days.
Experian Credit Score Range
Experian is comparatively young, starting in 1996. It actually generates both a FICO score and a VantageScore for you as well as a PLUS Score, which is solely for the consumer (lenders don’t look at it). Experian’s typical scoring range runs from 300 to 850, and a PLUS Score falls between 330 and 830.
With Experian, you can also get a business credit score, a report, and background checks (landlords can use this).
Equifax Credit Score Range
Equifax is the oldest brother out of the bureau – it was founded in 1898. It, too, provides FICO Scores and VantageScores using a range of 300 to 850.
If you get your credit score from Equifax, it can also tell you your Experian and TransUnion scores. So you can then compare the scores between all three bureaus.
How Does Your Credit Score Affect Your Life?
So how does all this affect you? All these numbers and scoring models can feel unattached to you – but on the contrary, it has a deep impact on your day-to-day life.
At its most basic, a credit score tells a potential lender how risky or profitable it will be to loan you (and any co-signers) money.
This affects your chances of buying a home, leasing a car, or being able to get a credit card for living expenses. If you’re going after the “American Dream,” your credit score is a large part of that.
Not only does it help determine if you can even get a loan, it determines how much you’ll end up paying in interest.
Think of a 30-year mortgage. One percentage point in the Annual Percentage Rate can have a huge effect on how much you end up paying in interest over those three decades. It could end up costing you hundreds of dollars each month.
So your credit, which determines your ability to borrow money, is measured by a credit score. Credit scores are calculated using a number of factors, and you can get your credit score from multiple different institutions.
Overall, the most convenient and accurate scoring method today may be VantageScore. It pulls info from all three credit bureaus — and that beats going to each bureau individually. To get your VantageScore, you can actually go through Experian or TransUnion. You can always use free credit score apps as well.
And remember, this is not considered a hard inquiry against your credit report, so there’s nothing to worry about.
If you still have questions, let us know in the comments! We know this can be a confusing topic, so we want to make sure you’re fully equipped to get the loans you deserve.
- Earn 5X Membership Rewards® Points for flights booked directly with airlines or with American Express Travel up to $500,000 on these purchases per calendar year.
- Earn 5X Membership Rewards® Points on prepaid hotels booked with American Express Travel.