Get Started Now

image

Get Started Now!

By clicking on "Get Started!", I agree to the Terms of Use, Privacy Policy and ESIGN Consent

image

What Is a Credit Score? Definition & Factors to Improving Score

A credit score is a three-digit number that creditors use to evaluate your creditworthiness. The higher your score, the more likely you are to be approved for a loan or credit card with favorable terms. A low credit score, on the other hand, can make it challenging to get approved for new credit.

Credit scores are based on information in your credit report, including your payment history, the types of accounts you have, and any bankruptcies or foreclosures on your record. While you can check your credit report for free, you’ll typically have to pay to see your credit score. 

What Is a FICO Credit Score?

FICO scores are the most widely used credit scores, and lenders consider them when making decisions about loans and lines of credit. FICO scores range from 300 to 850, and the higher the score, the better.

A score of 800 or above is considered excellent, and a score of 750-799 is considered very good. A score of 700-749 is considered good, while a score of 650-699 is considered fair. A score of 600-649 is considered poor, and a score of below 600 is considered bad.

FICO scores are based on credit report information, which means they take into account your payment history, outstanding debt, credit utilization, length of credit history, and types of credit. 

Is a FICO Score the Same as a Credit Score?

A credit score is a number that lenders use to help them decide whether or not to give you a loan. The higher your score, the more likely you are to be approved for a loan with favorable terms. A FICO score is one type of credit score.

FICO scores are calculated using information from your credit report, and they range from 300 to 850. The average FICO score in the United States is 704. While a FICO score is one type of credit score, it’s not the only type.

Other companies also offer credit scoring services, and their scores may range from 300 to 900. So, while a FICO score and a credit score are both numbers lenders look at to help them make lending decisions, they’re not the same.

Why Do I Have Different FICO Scores?

If you have ever checked your credit score, you may have noticed that there are several different scores out there. So why do you have different FICO scores?

FICO scores are calculated using information from your credit report. However, not all lenders use the same information when calculating your score. As a result, you may have a different score depending on which lender you are looking at.

Additionally, each lender may use a slightly different version of the FICO scoring model. This means that even if two lenders are using the same information, they may still come up with different scores for you.

Finally, remember that your score can change over time as your credit history changes. So if you check your score today and then again six months from now, the number may differ. Ultimately, there are a variety of factors that can impact your FICO score. 

Do Lenders Use FICO Scores or Other Credit Scores?

Most lenders use FICO scores when making lending decisions. However, other credit scores are available, and some lenders may use these instead of or in addition to FICO scores.

The VantageScore is the most popular alternative credit score, created jointly by the three major credit bureaus (Experian, Equifax, and TransUnion). VantageScores are based on similar information as FICO scores, but they use a different scoring system. As a result, a borrower’s VantageScore may be higher or lower than their FICO score. 

How Can a FICO Score Improve?

Several factors can impact a FICO score, including payment history, credit utilization, length of credit history, and types of credit accounts.

One of the best ways to improve a FICO score is to make on-time payments. Payment history is the most crucial factor in determining a FICO score, so avoiding late or missed payments is important. Another way to improve a FICO score is to keep credit utilization low.

This means using less than 30% of available credit lines, as maxing out credit cards can signal financial distress. Finally, maintaining a mix of different credit accounts (e.g., credit cards, mortgages, auto loans) can also help improve a FICO score.

How is a FICO score calculated?

The answer lies in the five critical components of a FICO score:

  • Payment history
  • Credit utilization
  • Length of credit history
  • A mix of credit types
  • New credit inquiries

Payment history is an essential factor in a FICO score, accounting for 35% of the total. A strong payment history indicates to lenders that a borrower is likely to repay their debts in full and on time. Credit utilization, or the amount of available credit that is being used, makes up 30% of a FICO score. Utilization levels below 30% are generally seen as favorable by lenders, as they suggest that borrower is not overextending themselves financially.

The length of credit history contributes 15% to a FICO score. This factor measures how long ago you opened the oldest account on a borrower’s credit report. A longer history usually indicates more excellent financial stability and responsibility. The mix of credit types makes up 10% of a FICO score. This factor looks at the variety of credit accounts on a borrower’s report, including revolving lines of credit.

Why is a FICO score important?

Your FICO score is one of the most important factors that lenders consider when determining whether or not to give you a loan. This three-digit number represents your creditworthiness and is used to predict how likely you are to repay a loan on time.

A high FICO score means you’re a low-risk borrower, which makes you more likely to get approved for a loan with favorable terms. Conversely, a low FICO score indicates that you’re a high-risk borrower, which makes it less likely that you’ll be approved for a loan or given good terms if you are approved. That’s why it’s so important to keep an eye on your FICO score and work to improve it if necessary. 

What does a credit score mean to a lender?

A high credit score indicates that a person is a low-risk borrower, while a low credit score means that a person is more likely to default on a loan. As a result, most lenders will offer better terms and interest rates to borrowers with higher credit scores.

Who creates credit scores?

Credit scores are primarily compiled by three major credit reporting agencies: Experian, Equifax, and TransUnion. These agencies collect information from a person’s credit history, including missed payments and outstanding debts. This data is then used to generate a credit score, which is designed to give lenders an idea of a person’s creditworthiness.

Can credit scores truly predict a borrower’s ability to repay a loan?

Credit scores are designed to give lenders an idea of how likely a borrower is to repay a loan. The higher the score, the more likely the borrower is to make timely payments. However, credit scores are not perfect.

They can sometimes give an inaccurate picture of a borrower’s ability to repay a loan. This is because they only take into account certain factors, such as payment history and outstanding debt. They do not always accurately reflect a borrower’s current financial situation or their ability to repay a loan in the future. As a result, credit scores should be used as one tool in the decision-making process, but they should not be relied upon entirely.

Jason Rathman
Latest posts by Jason Rathman (see all)