In a perfect world, all our bank accounts would be so flush and full that we could tap into them whenever we wanted to purchase something, no matter the cost. Unfortunately, it’s a rare individual who can do that. The majority of Americans borrow for a variety of purchases by taking out loans for things like homes, cars and college.
Your ability to do so hinges upon having a good credit score. Checking your credit score can be a bit of a challenge because you don’t have just one. Different lenders and scoring companies tend to use slightly different calculation models. But you can usually feel pretty comfortable with whatever FICO or VantageScore® indicate that your credit score is.
What Is a Credit Score?
Your credit score is a three-digit number that’s a snapshot of how creditworthy you are – whether you pay your bills on time and in full, and whether you’ve borrowed every dime that’s available to you. The higher your score, the better. Lenders decide whether to advance you money based upon your credit score, and it factors into the interest rate you’ll pay and other terms of the loan as well.
Who Does This Scoring?
Most credit scores derive from calculations performed by either the Fair Isaac Corporation – your FICO score – or VantageScore. Of the two, CNBC reports that FICO might be the scoring model of choice for most lenders. CNBC indicates that about nine out of 10 loans are approved or denied based on a borrower’s FICO score.
Experian agrees with CNBC. There are literally hundreds of scoring models out there if you take lenders’ individual tweaks into consideration, but FICO is probably top dog.
Both scoring models begin with the same step, accessing the information in your credit report. Your report comes from one of the three major credit reporting agencies: Equifax, TransUnion or Experian. These credit bureaus calculate their own scores as well.
How Is Your Credit Score Calculated?
Most models operate on a similar premise. They give weight to different aspects of your credit history as it’s contained in your credit reports, and some issues are considered more important or forgivable than others. Five factors are commonly taken into consideration:
- How often you’ve made late payments or defaulted on loans
- How much you currently owe lenders
- How long you’ve been borrowing
- How many new accounts you’ve applied for recently and how many potential lenders have looked at your score
- The variety of accounts you hold, such as mortgages and credit cards
FICO is pretty transparent as to the weight it gives to each of these factors. Your payment history makes up 35 percent of your score, and how much you owe overall represents 30 percent. That’s roughly two-thirds of your score right there. How long you’ve been borrowing contributes 15 percent, while new credit and your types of credit represent 10 percent each.
VantageScore has a model all its own, and it doesn’t share exactly what percentage each factor contributes to your score. It only indicates that your payment history is “extremely influential.” It cares more about the type of debts you currently support, how long you’ve been borrowing, and how much you currently owe lenders than it does the overall amount of your current debt. It cares even less about how many inquiries have been made into your credit recently.
Why Calculations Can Differ
Your scores can be different because they derive from the information in your credit report, and Experian, Equifax and TransUnion might all include marginally different information in their reports as it's provided to them by your different lenders. Your score can therefore depend on which report FICO, VantageScore or potential lenders are looking at. Potential lenders might tweak the scores to their own specific concerns, too, when they’re deciding whether to approve you for a loan.
To further complicate things, there are also “educational” credit scores out there. These are more or less intended just to give you an idea of where you stand. The Consumer Financial Protection Bureau has found that these are only reasonably accurate for three out of four people.
What Is a Good Credit Score?
Credit scores range from of a low of about 300 to a pretty awesome high in the area of 850. But your exact credit score down to a single digit typically isn’t as important as the range it falls into, which can be poor, fair, good, very good or excellent. A lender might not make a great distinction between scores of 665 and 680, but a difference between 665 and 800 will almost certainly raise a few eyebrows. Scores of 700 or more are generally considered to be good, and scores of 800 or more are considered excellent.
Read More: What Is the Credit Score Scale?
Your score isn’t stagnant, either. It can hitch upward or downward as months go by, based on your credit activity during that time. You might therefore want to check it a little frequently, particularly if you’re considering applying for an important loan. And you might not have a credit score at all until you’ve been borrowing for at least six months so there’s sufficient data in your credit reports from which to derive a score.
Why It’s Important to Know Your Score
Forewarned is forearmed, so you’ll definitely want to have a good idea of what your credit score is before you apply for any type of major loan, such as a mortgage or auto financing. You should know both your FICO score and your VantageScore because you can’t be sure which a potential lender will use. The same can apply to a simple credit card account, and it’s not just a matter of determining whether you’re likely to be approved or declined.
Your credit score will likely affect the interest rates you’ll pay on any of these types of loans. The higher your score, the more favorable rates and loan terms you’ll receive. Think of it as a reward, not to mention a bargaining tool. You might use it as a negotiation point to work out better terms with a lender if you know your credit score is pretty good.
You’ll also want to know where you stand if you’re considering taking other actions that you might not think have anything at all to do with your credit score. It’s not uncommon for landlords to check your credit score when they’re deciding whether you’ll be a good, timely-paying tenant, and even auto insurance companies can factor your credit score into the amount of premiums you’ll pay.
How Can You Get Your Free Credit Score?
A provision in federal law allows you to get a free copy of your credit report once a year, but unfortunately, this doesn’t include your credit score. Nor will your credit report include your score if you buy a copy of your report. You must typically pay an extra charge for this from one of the major credit bureaus.
You'll probably still be able to get your score for free, however, if you have an existing credit card lender or auto lender. These companies often provide their customers with their scores at no charge. The number might appear on your monthly statement, or you should have access to it if you've set up an account with them online. Whether you’ll get a FICO score or a VantageScore depends on your credit card company and the model they use.
Free credit-scoring websites abound on the internet, but you might want to take care here. You might think you’re getting your score for free only to realize that you’ve signed up and agreed to pay for a credit monitoring service or some similar type of service, and you might end up just getting one of those “educational” scores.
Finally, you can pay a visit to a nonprofit credit counselor if you’re concerned about your score because you’ve been struggling a little financially. Counselors who work in these places usually have the ability to pull your score at no charge to you, and they can work with you to improve it.
You Can Buy Your Score
Of course, you can get your credit score at any time if you’re willing to pay for it and none of the above options work for you. Maybe you don’t currently have an open loan or credit card account, and you have no reason to visit a credit counselor. The three major credit reporting agencies – Experian, Equifax and TransUnion – are always glad to sell you your score, and you can go directly to FICO or VantageScore as well and purchase your credit score directly from them.
And fear not, checking your own score won’t result in a ding that brings it down. Yes, having a lot of credit inquiries can affect that 10 percent of your FICO credit score, but only if they’re made by an entity from whom you’ve requested a loan. Buying your own score won’t affect this factor. It’s referred to as a “soft inquiry.”
How to Improve Your Score
Your eyes might pop when you get your score and you realize that it’s not what you think it ought to be. You’re not without recourse if this happens. First, get your hands on your credit reports, ideally from each credit reporting agency. Remember, you get one free report a year under federal law – just go to www.AnnualCreditReport.com – but you’ll have to pay for the others.
Your scores derive from what’s contained in these reports, so review them line by line. Look for errors. It’s not unheard of for misinformation to appear in credit reports, and that information can drag your score down. You have a few options if you find any mistakes. You can contact the lender who reported the misinformation, or you can file a dispute with the credit agency who reported it.
And, of course, your credit score is a direct reflection of how you handle credit. That’s its whole purpose. Take steps to improve your creditworthiness, if possible, if you find that yours isn’t quite what you thought it would be and if you find no errors in your credit reports to account for that.
Read More: How to Change Your Credit Score
Pay off some credit card debt to bring your balances lower, and be sure to make all payments on time. Don’t apply for any unnecessary credit, and don’t cancel any credit cards, particularly ones you’ve held for a while, thinking that this will help you. Remember, the longer you’ve been borrowing, the better. This factor accounts for 15 percent of your score.
You might have to give it a little time, but you can bring your score up with proper credit management.
- USA.gov: Credit Reports and Scores
- CNBC: A Good Credit Score Can Save You Thousands of Dollars
- Consumer Financial Protection Bureau: Where Can I Get My Credit Score?
- Equifax: How Can I Check Credit Scores?
- Experian: How Do You Check Your Credit Score?
- TransUnion: What Is a Credit Score?
- US Bancorp: What Is a Good Credit Score?
- Equifax. "What is a Credit Score?" Accessed Aug. 31, 2020.
- Wells Fargo. "How to Get a Loan: What Lenders Look For." Accessed Aug. 31, 2020.
- FICO. "Your FICO Score, From FICO." Accessed Aug. 31, 2020.
- FICO. "FICO Score Open Access Program Hits Milestone, Enabling Lenders and Financial Counselors to Offer Consumers Free Access to their FICO Scores." Accessed Aug. 31, 2020.
- Federal Trade Commission. "Using Consumer Reports for Credit Decisions: What to Know About Adverse Action and Risk-Based Pricing Notices." Accessed Aug. 31, 2020.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.