Your credit score – three numbers that hold considerable sway over your financial life — is often the first thing a lender wants to see before considering giving you a loan.
Your credit score can seem mysterious or even random, but you have more control over it than you may think. Understanding what a credit score tells lenders and how it’s different from a credit report is the first step to taking control. Here's what you should know.
FICO® vs. free credit scores
Among top lenders, 90% use FICO scores to make credit decisions. Your FICO score is not the same thing as your Vantage 3.0 score, though in some cases, you may be more familiar with the latter.
Your Vantage 3.0 score, also called an “educational score," is the number you’ll see on various free score-checking apps and websites. This score fluctuates often and can be a useful tool for gauging how your credit-use decisions may affect your FICO scores. However, it’s important to understand that this is NOT the credit score most lenders use when considering you for a loan.
Lenders prefer FICO score. FICO scores range between 300- 850, with most people’s scores falling between 600-750. Lenders consider scores between 670 and 739 good; you’ll need a score above 800 for most lenders to consider your credit excellent. You can purchase your FICO score from myfico.com; but many credit cards and banks also provide this score as a benefit for their customers.
Credit scores vs. credit reports
Your credit score is a number generated after evaluating five factors in your credit report. FICO doesn’t provide all the details on how they calculate your credit score, but do offer a breakdown of what they consider and how they weight each area.
Your credit report, on the other hand, is a record of your loans, balances, and payment history. The information on your credit report is used to calculate your credit score.
There are three major credit bureaus that house your credit data – Equifax, Experian, and TransUnion. Lenders look to the bureaus for information on how you handle your loans before lending you money, and they provide information to the bureaus on how you handle the loan they gave you. Lenders can choose to report to any, all, or none of the bureaus, which is why your credit report and scores often vary slightly between the three.
It's vital to monitor both your credit report and your credit score, as both affect whether you can get a loan and what rate you’ll be offered.
Five factors influencing you credit score
- Payment history — 35%
Paying on time each month keeps this aspect of your credit score high. Missing a single payment or just being reported late by 30 days late or more can hurt credit significantly. Charge-offs, collections, repossessions, foreclosures, tax liens, and bankruptcies inflict more damage.
- Credit use or utilization — 30%
Some loans, like credit cards and HELOCs, offer a line of credit, which you can use as needed. The more you use, however, the higher your credit utilization percentage goes, and using more than 30% of your available credit is not viewed positively. Max out your credit cards or, worse send them over their limit, and you will likely see your score drop precipitously.
- Length of credit history — 15%
The longer you've had credit, the better you often look to creditors, as long as is your history has been good. If you're just starting out, your credit score will be lower than someone with a long history, even if you both manage credit well.
- Credit mix — 10%
Creditors like to see you manage a mix of credit cards and installment loans. They also like to see you successfully manage the different types of credit.
- New credit — 10%
Every time you open a new credit account, lenders check your report, which affects your score temporarily. Opening credit accounts can “re-age" or drop the average age of all your credit. Getting too much new credit over a short time can drop you credit score noticeably.
It can take time to learn credit score management, but you do have control over how well you do in each area.
Raising your credit score
There are several ways to improve your credit scores. Although, if you’ve have any negative information, such as several late payments or bankruptcy, repairing your credit can take some time. Still, the following tips can help anyone improve their numbers.
- Stay on top of your credit score and credit report.
Check your report once a year to make sure all the information is accurate. Be sure to dispute any inaccuracies you find. Knowing what’s on your credit report will keep aware of your financial life and how you appear to lenders.
- Pay your bills on time
Lenders want to see that you are good paying your bills – all of your bills – that includes utilities, student loans, and credit cards. Pay all of your bills on time to keep the biggest portion of your credit score in good standing.
- Pay down your balances
Lenders prefer credit utilization ratios below 30 percent. If you’re not sure what your credit utilization ratio is right now, add up the limits on all of your open credit cards. Then add up the current balances you have and divide that total by your credit-limit total.
- Don’t close accounts when they’re paid off
Keeping accounts open after they’re paid off is another way to improve your credit utilization percentage. Just be sure not to view the paid off balances as ‘free money’; it rarely is.
- Don’t open accounts just to have a better credit mix
This likely won’t improve your score and could drop it, as multiple inquiries will have a detrimental impact.
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