Credit Score Guide

Everything you need to know about credit scores and how to improve yours

What is a Credit Score?

A credit score is a three-digit number that represents your creditworthiness based on your credit history. It's essentially a numerical grade that helps lenders assess the risk of lending money to you. The higher your score, the more likely you are to be approved for loans and credit cards with favorable terms and lower interest rates.

Credit scores are calculated using information from your credit reports, which are compiled by the three major credit bureaus: Equifax, Experian, and TransUnion. These reports contain detailed information about your credit accounts, payment history, amounts owed, length of credit history, new credit inquiries, and types of credit used.

Factors That Influence Your Credit Score

Payment History (35%)

Your track record of paying bills on time. Late payments, collections, and bankruptcies have a significant negative impact.

Credit Utilization (30%)

The ratio of your current credit card balances to your credit limits. Lower utilization (under 30%) is better.

Length of Credit History (15%)

How long you've had credit accounts. Longer credit histories generally result in higher scores.

Credit Mix (10%)

The variety of credit accounts you have (credit cards, retail accounts, installment loans, mortgage).

New Credit (10%)

Recent credit inquiries and newly opened accounts. Too many new accounts in a short period can lower your score.

It's important to understand that you don't have just one credit score. There are multiple scoring models used by different lenders and financial institutions. The two most common are FICO Score and VantageScore, each with their own versions and variations.

Credit Score Ranges

Credit scores typically range from 300 to 850, with higher scores indicating better creditworthiness. Here's a breakdown of what different score ranges generally mean:

300 850
Poor Fair Good Very Good Excellent

Poor: 300-579

  • Difficulty getting approved for credit
  • Very high interest rates if approved
  • May require deposits for secured credit

Fair: 580-669

  • Below-average approval odds
  • Higher interest rates than average
  • Limited options for premium cards

Good: 670-739

  • Good approval chances
  • Competitive interest rates
  • Access to good rewards cards

Very Good: 740-799

  • Excellent approval odds
  • Lower interest rates
  • Higher credit limits

Excellent: 800-850

  • Access to premium credit products
  • Best available interest rates
  • Highest credit limits

Keep in mind that these ranges are general guidelines, and different lenders may have their own criteria for what they consider to be good or poor credit. Some lenders specialize in working with consumers with lower credit scores, while others cater primarily to those with excellent credit.

FICO vs. VantageScore

There are two primary credit scoring models used in the United States: FICO Score and VantageScore. While both serve the same purpose of predicting creditworthiness, they have some key differences in how they calculate scores.

FICO Score

  • Created by Fair Isaac Corporation in 1989
  • Used by 90% of top lenders for lending decisions
  • Multiple versions exist (FICO Score 8, 9, 10, etc.)
  • Requires at least 6 months of credit history
  • Scores range from 300-850
  • Industry-specific scores for auto loans, credit cards, and mortgages

Key Factors:

  • • Payment History (35%)
  • • Amounts Owed (30%)
  • • Length of Credit History (15%)
  • • New Credit (10%)
  • • Credit Mix (10%)

VantageScore

  • Created jointly by Equifax, Experian, and TransUnion in 2006
  • Gaining popularity but less widely used than FICO
  • Current version is VantageScore 4.0
  • Can generate a score with as little as one month of credit history
  • Scores range from 300-850
  • More likely to score previously "unscorable" consumers

Key Factors:

  • • Payment History (41%)
  • • Depth of Credit (20%)
  • • Credit Utilization (20%)
  • • Balances (11%)
  • • Recent Credit (5%)
  • • Available Credit (3%)

While both models aim to predict the same thing—how likely you are to repay debt—they may produce slightly different scores for the same person. For most consumers, the difference is typically within 20 points. However, in some cases, the gap can be larger.

When applying for credit, it's helpful to know which scoring model the lender uses. Most mortgage lenders use FICO Scores, while credit card issuers might use either FICO or VantageScore. Many free credit score services provided by banks and credit card companies typically use VantageScore.

How to Improve Your Credit Score

Improving your credit score takes time and consistency, but even small changes in your financial habits can lead to significant improvements. Here are some effective strategies to boost your credit score:

Pay Your Bills on Time

Set up automatic payments or payment reminders to avoid late payments. Even a single 30-day late payment can significantly impact your score.

Reduce Credit Card Balances

Aim to keep your credit utilization ratio below 30%. Pay down existing balances and consider asking for credit limit increases.

Don't Close Old Credit Cards

Keep older accounts open to maintain a longer credit history. If you don't use the card, make a small purchase occasionally to keep it active.

Limit New Credit Applications

Each hard inquiry can temporarily lower your score. Only apply for new credit when necessary and try to space out applications.

Dispute Credit Report Errors

Regularly check your credit reports for inaccuracies. Dispute any errors with the credit bureaus to have them corrected or removed.

Diversify Your Credit Mix

If appropriate for your financial situation, having a mix of credit types (credit cards, loans, mortgage) can positively impact your score.

Become an Authorized User

Ask a family member with good credit to add you as an authorized user on their credit card. Their positive payment history could help your score.

Consider a Credit-Builder Loan

These specialized loans are designed to help build credit history. The money you borrow is held in a savings account while you make payments.

Be Patient and Consistent

Improving your credit score is a marathon, not a sprint. Depending on your current score and credit history, significant improvements can take several months to a year or more. Focus on building positive habits consistently, and your score will gradually improve over time.

Remember that there are no quick fixes for credit improvement. Be wary of any service that promises to "repair" your credit instantly for a fee. Many of these services simply do things you could do yourself for free, and some may even engage in questionable practices that could get you into trouble.

Credit Score Myths

There are many misconceptions about credit scores that can lead people to make poor financial decisions. Let's debunk some of the most common myths:

Myth: Checking your own credit hurts your score

When you check your own credit, it's considered a "soft inquiry" and does not affect your credit score. You can check your own credit as often as you like without any negative impact.

Myth: Closing credit cards improves your score

Closing a credit card can actually hurt your score by reducing your available credit (increasing utilization) and potentially shortening your credit history. It's usually better to keep cards open, even if you don't use them regularly.

Myth: Carrying a balance on credit cards builds credit

You don't need to carry a balance or pay interest to build credit. Using your credit cards and paying the full balance each month is the most cost-effective way to build credit.

Myth: Income affects your credit score

Your income is not a factor in calculating your credit score. However, income is considered separately by lenders when determining your ability to repay a loan.

Myth: Married couples share a credit score

Credit scores are individual, not joint. Even if you and your spouse share accounts, each of you has your own separate credit report and score.

Myth: Paying off a collection immediately removes it from your credit report

While paying off a collection is good, it doesn't immediately remove the item from your credit report. Most negative information, including collections, can remain on your report for up to seven years.

Understanding these myths can help you make better decisions about managing your credit. Focus on the factors that truly impact your score: paying on time, keeping balances low, maintaining a long credit history, limiting new applications, and having a mix of credit types.

How to Get Your Credit Reports and Scores

Monitoring your credit regularly is an essential part of maintaining good credit health. Here's how you can access your credit information:

Free Credit Reports

By federal law, you're entitled to one free credit report every 12 months from each of the three major credit bureaus (Equifax, Experian, and TransUnion) through AnnualCreditReport.com. During the COVID-19 pandemic, free weekly credit reports became available and this has been extended through December 2023.

Free Credit Scores

While credit reports don't include your credit score, there are several ways to access your scores for free:

  • Many credit card issuers and banks provide free FICO Scores or VantageScores to their customers
  • Credit monitoring services like Credit Karma, Credit Sesame, and Experian Boost offer free access to credit scores (typically VantageScore)
  • Some financial websites and apps provide free credit score monitoring

Tips for Reviewing Your Credit Report

  • Check for inaccuracies in personal information (name, address, Social Security number)
  • Review all accounts to ensure they belong to you
  • Verify account details (balance, payment history, credit limits) are correct
  • Look for unfamiliar inquiries that could indicate identity theft
  • Dispute errors directly with the credit bureau

Ready to Apply for Funding?

Understanding your credit score is the first step toward financial success. Whether you're looking to improve your score or ready to apply for funding, we can help.