When you want to borrow money, your credit score gives lenders a snapshot of how likely you are to repay it. The higher your score, the greater your chances of approval.
A solid credit score allows you to take out credit cards, buy a home or car, and save money with lower interest rates. Managing and raising your score is a fundamental part of your financial health. Here’s how to do it.
How Your Credit Score Is Calculated
The most widely used scoring system is known as FICO. It relies on information in your credit report from the three major credit bureaus: Equifax, Experian and TransUnion.
Calculating your credit score is based on several factors, each with a different weight.
Payment history is the most important, accounting for about 35% of your score. That means paying your bills on time is essential. Just one payment that's 30 days late can cause real damage to your score.
The amount you owe is the second-biggest factor, making up 30% of your score. Your credit utilization plays a key role here. It's the percentage of available credit you're using on credit cards and other similar accounts. It's a good idea to keep it below 30%. People with high credit scores generally keep it below 10%.
The rest of your score is based on factors including how long you've had credit, the types of credit you have, and how recently you've opened accounts or applied for credit.
You can also have a lower score simply because you don't have much of a credit history. This is known as a thin credit file. Even if you've never missed a payment, there may not be enough information to assess you.
Credit Score Ranges
A FICO credit score is a three-digit number from 300 to 850. Here's how the ratings stack up:
- Poor: 300 – 579
- Fair: 580 – 669
- Good: 670 – 739
- Very good: 740 – 799
- Exceptional: 800 – 850
Fair and poor scores below 670 make it a lot harder to qualify for credit. Interest rates will also be higher. A good score gets you average loans and rates. A very good score opens more doors for easy approval on many loans with more competitive rates. Exceptional credit lets you qualify for elite financial products and the best interest rates available.
To buy a house with a conventional loan, you'll likely need a minimum FICO score of 620. To buy a car, 670 is considered good. For basic credit cards, an average score around 650 will qualify you.
How Can I Check my Credit Score?
Equifax, Experian and TransUnion all let you check your credit score. You may need to set up an account and a paid subscription.
Your bank or credit card company may give credit scores for free as a customer benefit. Some websites will also give you your credit score for free in exchange for viewing credit card and loan offers.
Nonprofit credit counselors are another option. The U.S. Department of Justice has an approved list.
The Difference Between FICO and VantageScore
FICO isn’t the only system lenders use to gauge your credit. Twenty years ago, Equifax, Experian and TransUnion created VantageScore as an alternative.
Each system uses a 300-to-850 range, but their scoring categories have different cutoffs. That means the same credit history can result in one score appearing lower than the other.
VantageScore can also create a score with just one to two months of credit activity, while FICO can require six months. Consumers with a thin credit file, who wouldn't qualify for a FICO score, may qualify for VantageScore
Another notable difference is the type of payment history VantageScore may consider. The model can take on-time rent, utility, and telecom payments into account, which are payments that traditional FICO models haven't generally included. That can be useful for people with limited credit histories.
The bottom line is that both FICO and VantageScore use pretty much the same financial habits to calculate their results. Paying your bills on time and keeping a low credit balance can help raise each score.
How to Build or Improve Your Score
If you're starting with little or no credit history, a secured credit card may help. Unlike a traditional card, a secured card requires a refundable cash deposit that serves both as collateral and a credit limit.
A credit builder loan is another option. The lender places the amount you borrow in a locked account. The borrower makes fixed monthly payments until the amount is paid off, minus any loan fees. The advantage is that the lender reports regular payments to all the credit bureaus.
Another way to build credit is to become an authorized user on someone else's credit card account, typically a parent, family member or someone trustworthy. The important thing is that you manage that account responsibly.
If you already have a decent credit score and want to improve it, start with the basics: Pay your bills on time and keep your balances as low as possible. Prioritize paying your highest interest loans first. These will likely be credit cards.
If you've been managing your credit responsibly, you can request a credit increase from your lender. Higher limits can reduce your credit utilization. If you qualify for new credit cards, be choosy about their terms and interest rates.
It's also worth checking your credit report regularly. A report is different from your credit score because it's a comprehensive summary of every credit account you've had and your payment history. Errors on your credit report can lower your credit score.
