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Credit Score: Definition, Factors, and Improving It

August 20, 2022

What Is a Credit Score?

A credit score is a number from 300 to 850 that depicts a consumer’s creditworthiness. The higher the score, the better a borrower looks to potential lenders.

A credit score is based on credit history: number of open accounts, total levels of debt, repayment history, and other factors. Lenders use credit scores to evaluate the probability that an individual will repay loans in a timely manner.

There are several different credit bureaus in the United States, but only three that are of major national significance: Equifax, Experian, and TransUnion. This trio dominates the market for collecting, analyzing, and disbursing information about consumers in the credit markets.

The credit score model was created by the Fair Isaac Corp., now known as FICO, and is used by financial institutions. While other credit scoring systems exist, the FICO Score is by far the most commonly used. There are a number of ways to improve an individual’s score, including repaying loans on time and keeping debt low.

How Credit Scores Work

A credit score can significantly affect your financial life. It plays a key role in a lender’s decision to offer you credit. For example, people with credit scores below 640 are generally considered to be subprime borrowers. Lending institutions often charge interest on subprime mortgages at a rate higher than a conventional mortgage to compensate themselves for carrying more risk. They may also require a shorter repayment term or a co-signer for borrowers with a low credit score.

  • Excellent: 800–850
  • Very Good: 740–799
  • Good: 670–739
  • Fair: 580–669
  • Poor: 300–579

A person’s credit score also may determine the size of an initial deposit required to obtain a smartphone, cable service, or utilities, or to rent an apartment. And lenders frequently review borrowers’ scores, especially when deciding whether to change an interest rate or credit limit on a credit card.

What Is A Credit Score?

Credit Score Factors: How Your Score Is Calculated

The three major credit reporting agencies in the U.S. (Equifax, Experian, and TransUnion) report, update, and store consumers’ credit histories. While there can be differences in the information collected by the three credit bureaus, five main factors are evaluated when calculating a credit score:

  • Payment history
  • Total amount owed
  • Length of credit history
  • Types of credit
  • New credit

Payment history counts for 35% of a credit score and shows whether a person pays their obligations on time. Total amount owed counts for 30% and takes into account the percentage of credit available to a person that is being used, which is known as credit utilization. Length of credit history counts for 15%, with longer credit histories being considered less risky, as there is more data to determine payment history.

The type of credit used counts for 10% of a credit score and shows if a person has a mix of installment credit, such as car loans or mortgage loans, and revolving credit, such as credit cards. New credit also counts for 10%, and it factors in how many new accounts a person has; how many new accounts they have applied for recently, which result in credit inquiries; and when the most recent account was opened.

Vantage Score

This Vantage Score is a consumer credit rating product developed by the Equifax, Experian, and TransUnion credit bureaus in 2006 as an alternative to the FICO Score, created by the then-Fair Isaac Corp. in 1989.

Vantage Score was developed by the same three credit rating agencies that are used by FICO to develop its scores. Equifax, Experian, and TransUnion claim that Vantage Score uses machine learning techniques to generate a more accurate picture of a consumer’s credit.

FICO Scores remain the most popular credit score, employed by about 90% of all lenders.

However, the use of Vantage Score has been increasing, growing by about 20% annually since June 2015, based on studies conducted by consulting firm Oliver Wyman. The most recent study available, looking at July 1, 2018, to June 30, 2019, found that approximately 12.3 billion Vantage Scores were used by more than 2,500 users. Credit card issuers were the most prolific users of Vantage Score, followed by banks.

There are several points of difference between FICO and Vantage Score. FICO creates a single bureau-specific score for each of the three credit bureaus, using only information from that bureau. As a result, it is actually three scores, not one, and they can vary slightly, as each bureau will have different information about a consumer. A Vantage Score is a single, tri-bureau score, combining information from all three credit bureaus and used by each of them.

How to Improve Your Credit Score

When information is updated on a borrower’s report, their score changes and can rise or fall based on new information. Here are some ways that a consumer can improve their credit score:

Pay your bills on time: Six months of on-time payments are required to see a noticeable difference in your score.

Increase your credit line: If you have credit card accounts, call and inquire about a credit increase. If your account is in good standing, you should be granted an increase in your credit limit. However, it is important not to spend this amount so that you maintain a lower credit utilization rate.

Don’t close a credit card account: If you are not using a certain credit card, it is best to stop using it instead of closing the account. Depending on the age and credit limit of a card, it can hurt your scores if you close the account. Say, for instance, that you have $1,000 in debt and a $5,000 credit limit split evenly between two cards. As the account is, your credit utilization rate is 20%, which is good. However, closing one of the cards would put your credits’ utilization rate at 40%, which will negatively affect your score.

Work with one of the best credit repair companies: If you don’t have the time to improve your score, credit repair companies will negotiate with your creditors and the three credit agencies on your behalf, in exchange for a monthly fee. Additionally, given the number of opportunities that a great scores provides. It could be worthwhile to utilize one of the best credit monitoring services to keep your information secure.

What is a credit score?

A credit scores is a number from 300 to 850 that depicts a consumer’s creditworthiness. Factors considered in credit scoring include repayment history, types of loans, length of credit history, and an individual’s total debt.

Who calculates credit scores?

There are several different credit bureaus in the United States. But only three are of major national significance: Equifax, Experian, and TransUnion. This trio dominates the market for collecting, analyzing, and disbursing information about consumers in the credit markets.

The Bottom Line

Your score is one number that can cost or save you a lot of money in your lifetime. An excellent score can land you lower interest rates. Meaning that you will pay less for any line of credit you take out. But it’s up to you, the borrower, to make sure that your credit remains strong. So you can have access to more opportunities to borrow if you need to.

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