Credit Score: A Beginner’s Guide To Understanding Credit Score

A credit score is a number (usually a three-digit number) that indicates an individual’s creditworthiness.

Lenders, car dealerships that provide finance for auto purchase, credit card companies, and banks that provide mortgage loans etc. rely on scores to figure out the odds that a borrower will repay his or her debt as agreed and to decide if an individual is eligible for a credit card or a loan.

Without a credit score, it will be absolutely difficult for lenders to tell if someone looking to get a loan is creditworthy or not.

Even with a credit score, some borrowers still default on their loans.

Three credit bureaus are responsible for creating credit reports; TransUnion, Equifax, and Experian.

These bureaus credit scoring models are used by VantageScore and FICO to create credit scores that range from 300 – 850.

The credit bureaus can also calculate your scores using their various proprietary models.

The higher your credit score, the more credit worthy you are to banks, lenders and any other institution or individual who care about your score.   

Credit Scores: How They Are Calculated

Several different factors are considered when calculating your scores and they are known as your credit history.  

However, factors such as your national origin, race, marital status, gender or religion are excluded when calculating your scores.

What factors are considered when calculating credit scores?

Here are the metrics that make up your scores:

1. Payment History

Your payment history is one of the most crucial factors that is considered when calculating your credit score.

In fact, your debt payment history will make up 35% of your FICO score.

One of the first things many lenders are interested in is whether you’ve repaid past debts on time.

2. Credit Inquiries

When you apply for credit, lenders will verify your score in a process known as inquiry.

This process can affect your credit score based on your account. While a soft inquiry may not affect your score.

In contrast, a hard inquiry will have an impact on your score.  

3. Credit Utilization

Credit utilization refers to the ratio of the amount you have in your credit card balance compared to the credit limits you have.

For instance, if you have a $1000 credit balance while your limit is $2000, you have a 50% credit utilization.

4. Account Mix

Account mix, also known as credit mix refers to the several different types of accounts that you have.

This includes open accounts, revolving accounts, or installment accounts. Your account mix can have an effect on your total score.

5. Credit Age

Your credit age is made up of the age of your oldest credit account, most recent credit account, the average of all accounts, types of credit accounts such as auto loans, mortgage, etc. and the last time each of the accounts was utilized.

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Understanding Credit Score Range

Typically, credit scores are within the range of 300 – 850 and are categorized accordingly:

  • Excellent credit score
  • Good credit score
  • Fair credit score
  • Poor (bad) credit score

Although there are several different types of scores including industry specific scores, FICO® scores and scores by VantageScore are two of the most highly-rated credit scores.

So how does FICO rates your credit score based on its ranges?

Let’s find out!

FICO Score

FICO Scores are created by the Fair Isaac Corporation and it is one of the most recognized credit scores.

Generally, FICO Scores are preferred by many lenders and their scores range from 300 – 850.

If you have a FICO score that is above 670, it is seen as a good score. While scores that are above 800 are rated as exceptional.

FICO Score Range

Here’s how FICO rates your credit score:

FICO Score range image showing different credit score range.
FICO Score range. Image by Experian

So how does your FICO Score determine your eligibility to get loans?

How FICO Scores Impact Creditworthiness

Here’s how your FICO score affect your ability to get loans:

A simple breakdown of FICO Score range. Image by Experian

Alternatively, you can also opt for credit scores created by VantageScore

Credit Scores Created By VantageScore

As mentioned earlier, VantageScore was created by the three foremost credit bureaus: TransUnion, Equifax and Experian.

VantageScore also uses a score range o 300 – 850. So a VantageScore that is higher than 300 is seen as a good one, while a score above 750 is rated excellent.

VantageScore Range

Here’s how VantageScore rates your credit score:

VantageScore range showing the different credit scores
VantageScore range. Image by Experian

So how does VantageScore impacts your ability to get loans?

How VantageScore Impact Creditworthiness

Here’s how VantageScore determines your ability to get loans:

A simple breakdown of VantageScore range. Image by Experian

So what exactly can you do with your credit score range? 

Here’s how each score range determines what you’re eligible for:

Excellent Credit Score

An excellent credit score range gives you one good reason to heave a sigh of relief whenever you’re seeking a credit or a loan.

An excellent credit score also indicates that your credit age, payment history, credit mix, credit utilization, and inquiries are in an excellent shape.

With an excellent credit, you’ll enjoy several multiple perks on credit card offers, best loan rates and several other perks offered by lenders, banks, and credit card companies etc.  

However, an excellent credit doesn’t indicate that your credit is absolutely perfect and you can stop building it, mostly if you’re rated on the low end of excellent.

You’re strongly advised not to stop building your credit.  

Good credit score

According to Experian, 66% of Americans have a good FICO score or better. A good FICO score ranges from 670 – 739, while on VantageScore, it is 700 – 749.

A good score range is attractive to lenders and banks etc. as such it comes with a whole lot of benefits when applying for credits, especially loans or credit card.

Fair Credit Score

If you have a fair credit score, you still have a lot of options available compared to people with a poor score ranges.

You can even start applying for mortgages which often starts at a score of 620. You can also get auto loans with a fair score too.

In terms of credit cards, you’ll have a lot more options too. But nit up to the extent of enjoying 0% interest rates or high rewards.

The best thing you can do with a fair score is to press on for a good credit score so you can end up with more options in terms of loans, mortgages, credit cards and the likes.

Poor (Bad) Credit Score

A poor credit score will have a significant effect on your eligibility to borrow credit from lenders.

It is very difficult for people with a poor score to get an auto loan or even an excellent credit card at low-interest rates.

Even more, home or auto insurance will be higher as well as utility deposits that people with a better score often skip will be difficult too.

Falling into this category means you left some bills unpaid on your credit card or car loan.

But a bad or poor credit isn’t the end of your eligibility to get a credit.

You’ll definitely find lenders who are willing to lend and once you start paying your bills on schedule, your score will improve over time.

What Happens If You Don’t Have A Credit Score?

Sometimes, it is possible not to have a sufficient credit history to build a score.

This can make it very difficult for you to get a loan or even a credit card. This is one hurdle many young people have to scale.

But there’s a way out!

Here’s how you can establish credit:

If you’re below the age of 21, you should:

  • Request for the help of someone with established credit to co-sign a loan for you, add you as an authorized user to a valid and functioning credit card account, or open a joint credit card account with you.
  • You should request that your landlord and utility services providers report your good payment history to the credit bureaus.
  • You can use the help of a potential creditor by asking them to ask for your Extended View score from VantageScore or Experian from the three major credit bureaus: TransUnion, Equifax, and Experian.

The various different scores collected merge different sources of information to create a detailed perspective of your credit history.

However, if any of these doesn’t apply to you, work with your credit union or bank so you can be allowed to open an account with a small credit limit, to put the right foot forward.

Another option is to open a secured credit card. With good account management overtime, a good credit history and score will be established.

Bottom line

An excellent credit score can crumble into a bad shape if poorly managed. A poor or bad score can also be built overtime to make it a good one.

As such, always strive to improve your score at all times, even if you have an excellent score. There’s always a room to improve on perfection!

Williams Oleije

Williams Oleije

Williams Oleije is an Inbound Marketer, and a pop culture enthusiast. He's an avid researcher about how digital media is transforming marketing in several industries.

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