A credit score is a numerical representation of an individual’s creditworthiness, providing lenders and creditors with a quick way to assess the risk of lending to that person. Credit scores are used by lenders to make decisions about whether to extend credit, what interest rates to offer, and how much credit to grant. The most widely used credit scoring models are FICO scores and VantageScores. Here’s how credit scores are calculated and the score ranges:
FICO Score: FICO scores are among the most commonly used credit scores in the United States. They range from 300 to 850, with a higher score indicating better creditworthiness. FICO scores are calculated using the following factors:
- Payment History (35%): This is the most significant factor in your credit score. It considers whether you’ve paid your bills on time, any late or missed payments, and the severity of any delinquencies.
- Amounts Owed (30%): This factor looks at your credit utilization, which is the percentage of available credit you’re using. High credit card balances relative to your credit limits can lower your score.
- Length of Credit History (15%): The length of time you’ve had credit accounts, including the age of your oldest and newest accounts, impacts your score. A longer credit history is generally better.
- Credit Mix (10%): Lenders like to see a mix of different types of credit, such as credit cards, installment loans, and mortgages. A diversified credit mix can have a positive impact on your score.
- New Credit (10%): Opening multiple new credit accounts in a short period can negatively affect your score. Credit inquiries, which occur when you apply for credit, also fall into this category.
VantageScore: VantageScore is another widely used credit scoring model. VantageScores typically range from 300 to 850, with higher scores indicating better creditworthiness. The VantageScore model considers the following factors, though the specific weightings may vary among different versions:
- Payment History: Like FICO, VantageScore places a significant emphasis on payment history.
- Credit Age and Type: This factor considers the age of your credit accounts and the diversity of your credit mix.
- Credit Utilization: Similar to FICO, VantageScore looks at how much of your available credit you’re using.
- Total Balances: VantageScore considers the total amount of debt you owe across all your accounts.
- Recent Credit: This factor examines your recent credit inquiries and account openings.
Credit Score Ranges:
Both FICO scores and VantageScores fall into score ranges that reflect creditworthiness:
- Excellent: 800-850 (FICO) or 750-850 (VantageScore)
- Very Good: 740-799 (FICO) or 700-749 (VantageScore)
- Good: 670-739 (FICO) or 650-699 (VantageScore)
- Fair: 580-669 (FICO) or 550-649 (VantageScore)
- Poor: Below 580 (FICO) or Below 550 (VantageScore)
It’s important to note that the specific credit score range and factors considered can vary depending on the credit scoring model and the lender’s preference. Different lenders may also have their own criteria for determining creditworthiness.
Regularly monitoring your credit score, reviewing your credit reports for accuracy, and practicing responsible financial habits are key to maintaining and improving your credit score over time.