Credit Score

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.

Key Takeaways

  • A credit score is a number from 300 to 850 that depicts a consumer’s creditworthiness.
  • There are three main credit bureaus: Equifax, Experian, and TransUnion.
  • A credit score plays a key role in a lender’s decision to offer credit.
  • The FICO scoring system is used by many financial institutions.
  • Factors considered in credit scoring include repayment history, types of loans, length of credit history, and an individual’s total debt.
  • One metric used in calculating a credit score is credit utilization—the percentage of available credit currently being used. 
  • It is not always advisable to close a credit account that is not being used, since doing so can lower a person’s credit score.

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.

Conversely, a credit score of 700 or higher is generally considered good and may result in a borrower receiving a lower interest rate, which results in their paying less money in interest over the life of the loan. Scores greater than 800 are considered excellent. While every creditor defines its own ranges for credit scores, the average FICO Score range is often used.

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

Your credit score, a statistical analysis of your creditworthiness, directly affects how much or how little you might pay for any lines of credit that you take out.

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. 

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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:

  1. Payment history
  2. Total amount owed
  3. Length of credit history
  4. Types of credit
  5. New credit 
Factors That Impact Your Credit Score

Ellen Lindner / Investopedia

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.

Advisor Insight

Kathryn Hauer, CFP, Enrolled Agent
Wilson David Investment Advisors, Aiken, S.C.

If you have many credit cards and want to close some that you do not use, closing credit cards can indeed lower your score.

Instead of closing accounts, gather up the cards you don’t use. Keep them in a safe place in separate, labeled envelopes. Go online to access and check each of your cards. For each, ensure that there is no balance and that your address, email address, and other contact info are correct. Also, make sure that you don’t have autopay set up on any of them. In the section where you can have alerts, make sure you have your email address or phone in there. Make it a point to regularly check that no fraudulent activity occurs on them, since you aren’t going to be using them. Set yourself a reminder to check them all every six months or every year to make sure there have been no charges on them and that nothing unusual has happened.

VantageScore

VantageScore 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.

VantageScore was developed by the same three credit rating agencies that are used by FICO to develop its scores. Equifax, Experian, and TransUnion claim that VantageScore 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 VantageScore 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 VantageScores were used by more than 2,500 users. Credit card issuers were the most prolific users of VantageScore, followed by banks.


There are several points of difference between FICO and VantageScore. 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 VantageScore 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 credit report, their credit 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 credit score 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 credit 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 credit 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 credit score 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 score 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.

What is a good credit score to have?

Ranges vary depending on the credit scoring model, but generally, credit scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good; and 800 and higher are considered excellent.

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 credit 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.

Article Sources
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  1. Experian. “What Is a Good Credit Score?

  2. VantageScore. “VantageScore 4.0.”

  3. FICO Score. “FICO® Scores Are Used by 90% of Top Lenders.”

  4. VantageScore, via Internet Archive. “Oliver Wyman 2019 VantageScore Market Study Report,” Pages 1–2.

  5. VantageScore, via Internet Archive. “How It Works.”