What Is a Credit Score?

A credit score is a three-digit number that provides a snapshot of your creditworthiness. Popular credit scoring models use a range of 300 to 850. Credit scores are calculated using the information found in your credit reports, such as how many credit accounts you have, how long they’ve been open, whether you make payments on time, your account balances, and more. The primary objective of a credit score is to indicate how likely you are to repay a loan on time.

Why Lenders Use Credit Scores

When you apply for a loan or credit card, the lender will typically use your credit score, along with other information, to determine whether you qualify and what your loan terms, including the interest rate and fees, will be. Lenders use credit scores to make these decisions because they’re generally a good predictor of how likely the applicant is to pay back a loan or credit card balance and make on-time payments.

FICO® Score vs. VantageScore

The two most widely used credit scores are the FICO® Score and the VantageScore®. While the two scoring models are similar in some ways, they’re quite different in others.

• Scoring requirements: To generate a FICO® Score, you need to have at least one credit account that’s six months old and have activity on at least one credit account in the past six months. With VantageScore, however, you can get a score as long as you have at least one credit account open.
• Models: The VantageScore has a single model that can be used with all three credit bureaus (Experian, TransUnion, and Equifax), while FICO has slightly different scoring models for each bureau. Additionally, FICO creates specialized versions of its scoring models for auto lenders and credit card companies.
• Score ranges: For the VantageScore and the base FICO® Score, the range is 300 to 850. However, FICO’s bankcard and auto scoring models use a range of 250 to 900.
• Weighting factors: When calculating your credit score, VantageScore and FICO generally look at the same information. However, they weigh certain factors differently.

Why Are There So Many Different Credit Scores?

You might have noticed that your credit score looks different depending on where you look. There are a few reasons why you have so many credit scores:

• General updates: Over time, credit scoring companies like FICO and VantageScore have updated their scoring models to account for changes in consumer behavior, technology, and industry practices.
• Varying underlying information: Because information found in your credit reports can vary slightly from bureau to bureau, your credit score can look different, depending on which credit reporting agency the model used to calculate it.
• Industry-specific models: There are also different credit scoring models for specific industries, which can provide more predictive information for that industry.

What Factors Affect Your Credit Score?

When it comes to your FICO® Score, there are five key factors that can affect your score. While FICO lists specific percentages for how much each factor influences your score generally, their exact impact on your score depends on your credit profile:

• Payment history: Your payment history makes up 35% of your FICO® Score and indicates whether you’ve paid your bills on time. Even one missed payment can have a negative impact on your score for up to seven years.
• Amounts owed: The total amount of debt you have has an impact on your credit score. More important, though, FICO looks at your credit utilization ratio, which is the percentage of the available credit on your credit cards that you’re using at a given time. This factor makes up 30% of your FICO® Score.
• Length of credit history: Accounting for 15% of your FICO® Score, your length of credit history encompasses how long you’ve been using credit and also the average age of your credit accounts.
• New credit: This factor, which makes up 10% of your FICO® Score, looks at the number of credit accounts you’ve opened recently, as well as how many hard inquiries lenders have made in the past year.
• Credit mix: Rounding out the last 10%, credit mix has to do with how well you can manage a diverse credit file. For example, someone with a credit card, student loan, auto loan, and mortgage loan may have an easier time building credit than someone with just a credit card.

What Is a Good Credit Score?

According to FICO, a good credit score is a score that’s 670 or higher. Here’s a breakdown of all the FICO® Score ranges:

• Exceptional: 800 to 850
• Very good: 740 to 799
• Good: 670 to 739
• Fair: 580 to 669
• Poor: 300 to 579

How to Improve Your Credit Score

While there are some general steps you can take to build and maintain good credit, many of the ways to improve your credit score will be specific to your situation and credit history. Here are some best practices to help you get started:

• Pay Your Bills on Time: If you’ve always paid your bills on time, keep doing so. However, if you have some past-due payments, get caught up as quickly as possible and make it a priority to pay on time going forward.
• Pay Down Credit Card Balances: While some financial experts recommend keeping your credit utilization rate below 30%, there’s no specific threshold at which point your utilization rate starts hurting your credit score. In fact, the lower your rate, the better.
• Avoid Frequent Credit Applications: Applying for credit regularly not only results in multiple hard inquiries but it can also bring down the average age of your credit accounts. As a result, it’s a good idea to only apply for credit when you absolutely need to.
• Dispute Inaccurate Credit Information: As you review your credit reports, look for information that may not be accurate. Fraudulent and incorrect credit report information could potentially harm your credit score. If you find something, you have the right to file a dispute with the credit bureaus.
• Use Experian Boost®: Experian Boost allows you to add positive payment history to your Experian credit report that doesn’t traditionally get reported. This includes eligible rent payments, utility bills, and even some streaming subscriptions.

The Bottom Line

Credit scores can be complicated, but the process of building good credit is more straightforward. As you take steps to improve your credit score, continue to monitor your credit score regularly to track your progress and identify potential issues as they arise. Over time, your understanding of how your credit score works will improve, making it easier to maintain the good credit habits you’ve developed.

For any mortgage service needs, contact O1ne Mortgage at 213-732-3074. Our team of experts is here to help you navigate the complexities of mortgage loans and ensure you get the best possible terms.