And why should I care about my credit score, anyway?
Your credit score is an estimate of how risky it is for banks to lend you money. The higher your score is, the more likely you are to repay your debts. A lower score suggests to lenders that you are more likely to make late payments or stop paying your debts altogether. Your score is calculated based on your credit history with the big three credit reporting agencies – Experian, Equifax and Transunion.
There are two types of credit scores commonly used today. The FICO score, which originated in 1989 by the Fair Isaac Corporation, is much more widely used by lenders (particularly mortgage lenders) and is generally not available anywhere free of charge. The VantageScore is a newer scoring model that was jointly developed by the credit bureaus in 2006, and is the score powering most of the “free credit score” consumer lead-gen websites and apps on the market today.
Both scores exist on a range from 350 to 850. Whenever a “credit score” is mentioned on this website, assume it is a FICO score. (You may occasionally see commentators dismissing the VantageScore as a “FAKO” score, or fake score.)
How is my credit score calculated?
Your credit score is determined by these five factors, from most important to least:
- Payment history (35%). Late payments will tank your score fast, and stay on your credit report for up to 7 years. A single late payment may be a minor setback, but a history of late payments takes a long time to recover from, even after you’ve shaped up and built better financial habits.
- Credit Utilization (30%) – how much of your available revolving credit (that is, credit cards and credit lines, not mortgages, student loans, auto loans or other installment loans) is actually in use. Your credit score will take a noticeable hit if your utilization ratio creeps up above 30%.
- Length of credit history (15%) – longer credit histories = better score. Closed loans and credit cards will eventually drop off your credit report. The usual guidance is to leave your credit cards open even if you’re not using them anymore, is this extends the average age of your credit card accounts and thus your overall length of credit history.
- Types of credit in use (10%) – this refers to the mix of credit types in your credit history. A credit user with $20,000 of debt reported across an auto loan and a few credit cards will, all other things equal, have a higher score than a credit user with the same amount spread over just credit cards.
- New credit (10%) – opening a new credit account incurs what’s called a “Hard inquiry” on your credit report, which stays on your report for 2 years and temporarily drops your score by a few points. Opening a lot of new accounts in a short period of time (aka ‘app-o-rama’) drops your score a lot more. Strategically freezing and unfreezing your accounts before applying can help keep your individual credit reports cleaner. However if you’re going to be shopping for a mortgage in the near future, it’s best to keep your hard inquiries to a minimum.
Credit Score FAQ
What credit score do you start with?
None – until you open your first credit card, student loan or other debt product, you’re not in the system and don’t have a credit score at all!
Credit Lore: Dave Ramsey famously observed years ago that once he paid off his mortgage, which was his last remaining form of debt after paying off his consumer debts, he dropped out of the credit reporting system and no longer had a credit score.
What’s the maximum credit score?
The credit score range tops out at 850. Is 850 meaningfully better than 840 or 825? Plausibly, but anything over 800 is considered an “Excellent” credit risk.
What are the benefits of having a good credit score?
Three main benefits of a good credit score:
- Lower interest rates on debt products (mortgages, auto loans, credit cards)
- Many potential employers and landlords will pull credit reports for applicants along with background checks. When considering two otherwise-equal applicants, it’s a safe bet that the job or apartment will go to the person perceived to be more financially responsible.
- Access to premium credit cards and credit rewards programs.
Do student loans affect your credit score?
Student loans are reported on your credit history and are included in the calculations for your credit score. Student loans do positively boost the length of history and credit mix factors of your score. However, late payments on these loans will hurt your score more than the other factors help.
How do I get an 800 credit score?
Pay every bill on time, consistently over many years – a decade even. Never get a bill sent to collections. Spend less money than you earn and save the extra for a rainy day. Monitor your credit reports regularly for signs of identity fraud and Immediately report any unfamiliar accounts or activity to all three credit bureaus. If these don’t sound like the kind of behaviors you’d usually do, become the kind of person who would do them.
Is 700 a good credit score?
A 700 credit score falls into the range of “good” (670 – 740). Unless you have a history of late payments, you will likely be approved for a car loan or a credit cards with a 0% balance transfer or intro APR offer.
What can I do with a 600 credit score?
You can pay outrageously high interest rates on terrible consumer debt products consistently, on time, over the course of many months or years until your score improves. All the other advice for getting an 800 score applies here – spend less than you make, save money, don’t ever let a bill get sent to collections, etc.
What credit score is needed to buy a car?
Auto loan rates are divided into two categories – new-car loans and used-car loans. Rates for new-car loans are generally a little lower.
A credit score of 670 or higher should get you a “prime” loan with average interest rates. Below that you’re a “near prime” borrower, which will add a few points to the interest rate on loans available to you. If your score is close to the prime threshold and you’ve had a few hard inquiries in the last 2 years, it may be worth it to wait a few months for those credit pulls to fall off of your report, and hopefully apply with an improved score.
If you’re car shopping with a credit score below 600, you are in “subprime” territory and will pay the highest interest rate on your loan. If you have the cash to buy a cheap used car outright, it may be worth shopping for a deal and financing a car in a few years, after you’ve had time to improve your score.
What credit score is needed to buy a house?
620 is a minimum, but you will pay a lot more over the course of your loan than a borrower with good, very good or excellent credit. Some government programs will allow you to buy a home with as low of a score as 500, but they come with restrictions on what/where you can buy and you’ll need to make a sizable down payment in addition to paying higher interest rates.
Per this table from Experian, you can see that average mortgage interest rates fall quickly for borrowers with scores in ~20-point increments. You’ll save a lot of money in mortgage interest if you can raise your score from 655 to 670 before applying.
Note that your credit score isn’t the only item lenders look at when underwriting a mortgage loan. Your annual income, ratio of debt to income, other assets your own, and the size of your down payment all factor into the overall picture of your financial health that lenders look at when issuing a mortgage loan.