May 18, 2022

How are Credit Scores Determined? And How Does Yours Stack Up?

Whether you're looking to purchase a home, finance a vehicle, or even get a job, your credit score plays a major role in the process. A good credit score can save you thousands of dollars in interest and improve your chances of being approved for loans and lines of credit. Familiarizing yourself with this three-digit number and understanding how it is calculated is crucial to maintaining a good credit history and financial health. So, how does your credit score stack up?

Kaye

What’s a Credit Score and how’s it Calculated?

A credit score is a three-digit number that lenders use for evaluating your creditworthiness. It is based on the information found in your credit report, which includes many factors, such as your payment history, credit utilization, length of credit history, types of credit, and public records.

The reason credit scores are so important is that they are used by lenders to determine whether you are a good candidate for a loan or to extend credit. It also helps them to decide what interest rate to charge you.

There are two primary ways of determining credit scores: FICO® Scores and VantageScore®. FICO® Scores are the most widely used credit scores and are used by the vast majority of lenders. VantageScore® is a newer credit scoring model, and while it is becoming more widely used, it is not yet as widely accepted as FICO® Scores.

Credit Score Ranges: What's Good and What's Bad

Credit scores range from 300 to 850, the higher number, the better your credit. The average credit score in the U.S. is 680, which is considered good. A score of 700 or above is considered very good or excellent, while a score below 650 is considered poor, and you may have difficulty qualifying for loans or lines of credit with favorable terms. If your score is in this range, you should consider credit repair to improve your credit and boost your score.

Credit Score Ranges: Excellent, Good, Fair, Poor

Let's look at the different ranges and what they mean for your creditworthiness.

  • 300 to 579: Poor – unlikely to qualify for most loans and lines of credit
  • 580 to 669: Fair – may be able to qualify for some loans and lines of credit, but will likely have to pay higher interest rates
  • 670 to 739: Good – generally favorable terms from lenders; may be able to get lower interest rates on loans and lines of credit
  • 740 to 799: Very Good – often able to get the best rates from lenders
  • 800 to 850: Excellent – most favorable terms from lenders, including the best interest rates

Factors that Determine Credit Scores: How Your Score Is Calculated

FICO® Scores are calculated using five key factors:

  • Payment history (35%)
  • Credit utilization (30%)
  • Length of credit history (15%)
  • Credit mix (10%)
  • New credit (10%)

Payment history and credit utilization make up the lion's share of your FICO® Score, so it's important to keep both in good standing. Payment history includes things like on-time payments, late payments, and bankruptcies. Credit utilization is the total amount of debt you have in comparison to your total available credit limit. It's important to keep your credit utilization low, as maxing out your credit cards can signal to lenders that you're struggling to manage your debt. Most financial experts recommend a credit utilization of 30% or less.

Length of credit history and credit mix are also important factors in your credit score. Length of credit history is a measure of how long you have been using credit; a longer history is generally better for your score. Credit mix is a blend of different types of credit, such as revolving credit, for example, credit cards and installment loans, such as  auto loans. Having a mix of different types of credit is generally better for your score than having just one type.

New credit is the final factor in your credit score, and it looks at the number of new credit accounts you have and the inquiries on your credit report. Having too many new credit accounts can signal to lenders that you're taking on too much debt, and too many inquiries can suggest that you're looking for credit from multiple sources.

How to Improve Your Credit Score

If your credit score needs a boost, there are a few different steps you can take to improve it. Some –or all – of the following strategies may help:

Always pay your bills on time

Payment history is the most critical factor in determining your credit score, so it's important to pay all your credit accounts on time, every time. If you have been struggling to keep up with your payments, there are a few things you can do to get back on track.

First, set up automatic payments for all your bills. This way, you can be sure that your payments will always be on time. You can also set up reminders for yourself so that you don't forget to make a payment.

Second, if you have any past-due payments, make a plan to catch up. You may be able to negotiate with your creditors to have late payments removed from your credit report if you can show that you're making a sincere effort to catch up.

Last, if you have any collections accounts, pay them off as soon as possible. Collections can have a major negative impact on your credit score, so it's important to get them paid off.

Increase your credit line

Another way to improve your credit score is to get a credit increase. The reason this helps is that it effectively lowers your credit utilization ratio.

Your credit utilization ratio is the amount of the overall debt you carry in comparison to your total credit limit. For example, if you have a credit card with a $1,000 limit and you owe $500, your credit utilization ratio is 50%. If you were to get a $1,000 increase on that same line of credit, you would then lower your credit utilization ratio to 25%.

Don’t close your credit accounts

One common misconception is that closing a credit card account will help your credit score. In reality, though, closing an account can actually hurt your score. The reason is that one of the factors in your credit score is your length of credit history. If you close an account that you've had for a long time, you're effectively shortening your credit history. In addition, closing an account can also increase your credit utilization ratio. A better strategy is to keep your accounts open and active, even if you use them sparingly.

Work with a reputable credit repair service

If you're struggling to improve your credit score on your own, you may want to consider working with a credit repair service or using an online credit building solution such as Kredit. Credit repair services can help you dispute errors on your credit report, negotiate with creditors to remove negative items and set up a plan to pay down your debt. They can also help you build positive credit habits so that you can improve your score over time.

Become an authorized user

If you have a family member or close friend with good credit, you may be able to improve your credit score by becoming an authorized user on their account. By doing this, you'll have access to their credit history, which will be reported on your credit report. Just make sure that the account is in good standing and that the individual is reliable. If the account has a good payment history and a low credit utilization ratio, becoming an authorized user can give your score a boost.

Your credit score is an important number that can have a major impact on your financial life. By taking the time to understand how it is calculated and what you can do to improve it, you can take control of your financial future. If you're not sure where to start, you can check your credit report for free to see where you stand. If your score needs improvement and you're not sure how to fix it, consider working with a reputable credit repair company to help you get back on track.

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