When we talk about credit scores, it’s easy to wonder who is doing all of the compiling of data. By and large, the three big players in the credit score business are the three major credit reporting agencies, Equifax, Experian, and TransUnion.
Each of these companies makes money selling your credit information, history, and your credit score to banks, businesses, and even potential employers. Your credit report details your payment history, the amount of debt you’ve piled up, and where you work and live. It even includes if you’ve ever been sued, arrested, or filed for bankruptcy. All of this information is used to generate a credit score – basically a grade – that measures your financial reliability. The higher the score, the better. Each credit bureau develops their own score, but the information is all compiled and interpreted by a company called FICO (formerly Fair Isaac Corporation), which generates a single score that most creditors use.
What is a Good Credit Score?
When it comes to the most popular type of credit score, your FICO score, you may be assigned any number between 300 and 850. Generally speaking, a credit score of 700 or higher is considered favorable. Here’s how other ranges of scores ranked when compared to the norm:
- Anything under 640 is considered a poor score: You’re likely to be considered a high-risk borrower, and that means your credit card interest rates will be much higher than average and you won’t qualify for a typical loan.
- A credit score of 641-680 is fair: You may qualify for that loan or credit card, but your rate will be relatively high.
- A credit score of 681-720 is good: You’re in the pocket. With a score in this range, you’ll get plenty of credit card offers, qualify for loans with good rates, and pay lower insurance premiums.
- A credit score of 720-850 is excellent: At this level you get the best rates on credit cards, car loans, and home mortgages. Above 720 is generally considered a “perfect” score.
What Affects My Credit Score?
The “how and why” of your credit score doesn’t have to be a mystery. There are tangible reasons why your score changes, and specific steps that can be taken to improve it. Let’s look at the factors that impact your credit score the most, according to FICO.
- Credit History (35%) – Timely repayment of borrowed money is the most important factor in your credit report, impacting 35% of your FICO score. This includes credit cards, retail accounts (like department store credit cards), loans, and finance company accounts. A single late payment can impact your score for up to seven years. Your credit history also includes bankruptcies, foreclosures, lawsuits, and other public record and collection items. These legal actions can impact your score for up to 10 years, though the impact slowly decreases with time.
- Amounts Owed (30%) – Carrying a large debt load can lower your score, even if you make payments on time. Having used a large portion of your available credit can account for 30% of your credit score. FICO also considers remaining balances due, as well as the number and types of credit accounts you have.
- Length of Credit History (15%) – The longer you’ve managed credit, the better. Having a brief credit history can lower your score.
- Types of Credit (10%) – This is not a key factor, accounting for only 10% of your FICO score, but still a consideration. Try to have a good mix of credit; retail accounts, credit cards, installment loans, and a mortgage are all considered. For example, not having a credit card can actually lower your score.
- New Credit (10%) – FICO believes that having several new credit accounts pop up in your report within a short period of time means you represent a greater lending risk, especially if you have a short credit history.