Your credit score is one of the most important financial numbers tied to your name. While some pundits believe you can go through life without using credit at all this simply isn’t true for the average person. (read: Do you Really need a Credit Score?)
Whether you are getting a rewards credit card, buying a home using a mortgage, or getting a car loan, you simply need to have a good credit score in life. With a poor credit score you will face higher interest rates. A 1% increase in a mortgage rate will cost you thousands of dollars over the life of the loan. (The difference between a $160,000 mortgage over 30 years fixed at 3.375% and 4.375% is $32,941.)
You know you need to track your credit score, but which one? There are so many options touted online, on TV ads, and in your mailbox. If you track the wrong credit score you may not know what your actual score is.
What are the Various Credit Scores?
Trying to figure out which credit score is the “right” score for you to care about is confusing.
The three credit bureaus — Equifax, Experian, and TransUnion — have worked together to develop their own credit scoring system called VantageScore. The score used to have a scoring range from 501 to 990, but in VantageScore 3.0 the range has changed to 300 to 850. The company says it is because consumers are most familiar with this range (this is the range that FICO scores use). Prior to the change, a score of 750 on the VantageScore could be misunderstood as a really great score (as it would be on the FICO score range). The change has been made to eliminate this confusion.
FICO Scores from Credit Bureaus
The credit score that is most often used by lenders to make a decision on whether or not to extend credit to you is your FICO score. FICO scores were developed by the Fair Issaic Corporation (which formally changed names to FICO in 2009).
FICO’s model is used by three different credit bureaus under three different names. This is on top of the credit score model that the bureaus made themselves. Confused yet?
Here is what the three FICO scores at the credit bureaus are called:
- BEACON Score (Equifax)
- Experian/Fair Issac Risk Model (Experian)
- EMPIRCA (TransUnion)
However, this is just for the general FICO score. FICO also has scores for specific products like bankcards, auto loans, mortgages, and so forth. However, understanding your generic FICO score is generally a great indicator of what you can expect lenders to know about your credit worthiness.
Which is the Right Credit Score?
Determining which score is the right credit score for you to track depends on what you will be using your credit for. However, in almost all situations the FICO score will be used by the lender to determine your credit worthiness.
You can use VantageScore and other models as a baseline to track your overall credit history. Companies like Credit Karma and Credit Sesame use models from the bureaus to help you track what is going on with your credit report. However, just because you have a great score on one of the websites doesn’t mean that is the score the lender you need credit from is going to use. You can use the sites to track changes, just don’t count on it as a definitive indicator of your true credit worthiness.
What is Your FICO Credit Score Made Up Of?
If your FICO score is the one you should truly care about you should probably understand what makes up the score. Minimize mistakes in the various areas that the FICO score tracks will lead to a higher score as time goes on.
Here is how your FICO score is broken up:
Total FICO Score Range
The general FICO score ranges from 300 to 850. But knowing your score doesn’t give you the full picture. Different lenders view scores differently.
Here is how the ranges break out between how lenders view your score. Remember this is a general rule of thumb, not something that is put out by FICO as a standard score sheet:
- Excellent: 720-850. Anything above 720, 730, or 750 (depending on who you ask) is going to land you the best financing available. While you might get 0.05% of a better rate with an 850 than you would with a 755, the overall difference is not that high.
- Very Good: 660-719. Still a pretty good score, being over 700 is where you want to be to increase your chances of being approved for favorable rates or the best credit cards.
- Fair: 600-659. Sometimes seen as “sub-prime” by lenders, this is where you starts showing up as a credit risk. If you are approved for the loan you will probably pay higher interest than you would with a higher credit score.
- Poor: Less than 600. You are an extreme credit risk. This is the range your score falls to when you file for bankruptcy or have a mortgage foreclosed on.
35% of FICO Score: Payment History
Your ability to pay your current creditors on time is something that should be very important to a new potential creditor. That’s why 35% of your FICO score is your payment history. Late payments and missed payments will drastically impact your score.
30% of FICO Score: Amount Owed
Having a lot of large credit lines is a great thing. Have a lot of large credit lines that are maxed out is a terrible thing that will pull your score down. Being extended credit is one thing, but if you are using a lot of the total credit available (or all of it) you are seen as a credit risk. Lenders want to see you use less than about 20% of your credit lines available for products like credit cards.
15% of FICO Score: Length of Credit History
The longer you show you can handle the responsibility of having credit extended to you, the more favorable you are viewed. This portion of the score looks at when you first credit line was established, when your most recent credit line was established, and calculates the average age of your credit accounts.
10% of FICO Score: New Credit
Opening up 6 new credit card accounts in the same weekend is a red flag to lenders. Your score takes into account when you are attempting to get, and are granted, new credit lines.
10% of FICO Score: Types of Credit
Lastly the score looks at the various types of credit you are using. It isn’t a requirement that you have a mortgage, a car loan, and a bunch of credit cards. But if you don’t have a lot of other information in your credit file the mix of credit you do have will weight slightly heavier on your score.