Everything You Need to Know About Credit Scores

Do you know your credit score? Nearly a quarter of Americans never check their score, according to research by Javelin.

The world of credit scores is confusing and fraught with misinformation. Sometimes, what you’d assume would be good for your credit can actually lower your score – and vice versa. It might feel better to ignore your score completely.

However, taking the time to understand how credit scores work is crucial if you want a strong score. The good news is that a strong score can save you serious money over time.

Whether you want to borrow money, open a utility account or rent an apartment, you’re asking an entity to trust in your ability to pay your bills on time. Lenders and landlords can’t call up every one of your credit card issuers since sophomore year and ask whether you’re good with money. Instead, they’re going to pull your credit score.

If your entire financial life could be boiled down to one number, it would be your credit score. It’s a three-digit figure that represents your history of borrowing and paying back money. The higher the score, the more trustworthy you’re considered to be by creditors.

Although you might scoff at the idea that your borrowing history could be reduced to a single arbitrary number, creditors take it very seriously. A poor credit score could mean paying sky-high interest rates on credit cards and loans (if you’re approved at all). You might be asked to pay a deposit upfront to open a cell phone account. And that dream apartment you applied for? The landlord might hand the keys to a tenant with better credit instead.

On the other hand, having a high credit score means borrowing money at the lowest rates available. You don’t have to worry about losing out or paying more because you appear financially irresponsible.

You might assume that a credit score and credit report are interchangeable. Though they are closely related, a credit report and a credit score are two separate items, and understanding the difference is important.

The three major credit bureaus – Experian, Equifax and TransUnion – collect your personal and financial information and compile it all into your credit report. Credit reports detail personally identifying information such as your name, address and Social Security number, as well as open and closed credit card accounts, loans, bills in collections, liens and bankruptcies.

You’re entitled to a free credit report from each of the three major bureaus through AnnualCreditReport.com, the only site federally authorized to provide free credit reports. While previously you could only access each report once per year, in the wake of the COVID-19 pandemic the bureaus are allowing free weekly reports until the end of 2022.

Using the information in your credit reports, companies will calculate a credit score that is then shared with banks, lenders and other organizations. Because there are multiple credit bureaus, you have more than one credit report and credit score.

It might seem hard to believe: You have not one, not a few, but dozens of credit scores. However, they’re not all created or used equally.

Data analytics company FICO is the biggest and most ubiquitous source of credit scores. FICO produces credit scores based on the information found in your credit reports. Since each bureau collects and reports your information independently, your FICO score will usually differ among them.

“Even under the FICO brand, there are several different models used for different purposes, like for considering a mortgage application versus a credit card application,” says John Ganotis, founder of the website Credit Card Insider, which recently merged with personal finance site MoneyTips.com. In fact, there are about 16 versions of the FICO score used today.

Though FICO is the most widely known credit scoring model, it certainly isn’t the only one. “A little over a decade ago, the three credit bureaus started a joint venture and created VantageScore, a competing model for FICO scores,” says Lyn Alden, founder of Lyn Alden Investment Strategy, a website that provides market research to individual investors and financial professionals. She notes that VantageScore is now considered another “real” credit score used by lenders – but with less market share than FICO.

While the specific formula is proprietary, we know the FICO model is based on these five main credit score factors:

What about VantageScore? “While exact percentages have not been revealed, VantageScore has revealed that it weighs its credit score similarly to FICO, with payment history and credit utilization being the most important factors,” Alden says. These are followed by age of credit, credit diversity and new credit as less important factors. “Usually, FICO scores and VantageScores for the same individual are close in number,” she notes.

When it comes to what constitutes good or bad credit, each creditor has its own definition. Even so, credit scores break into different ranges that indicate where a consumer generally falls on the spectrum of creditworthiness.

FICO’s credit score ranges are as follows:

As of 2021, the national average FICO credit score was 714.
VantageScore 3.0 also ranges from 300 to 850. However, scores are categorized a bit differently:

The average VantageScore is 697 as of May 2022.

Don’t stress about maintaining the perfect credit score for every algorithm out there. If you have a solid FICO score, you’re probably in good shape since this is the scoring model used by 90% percent of lenders when evaluating applicants. And you don’t need an 850 to get the best interest rates. Generally, a FICO score above 760 gets you access to the same rates and terms as someone with perfect credit.

Your credit score can fluctuate over time, which is why it’s a good idea to keep an eye on it. In the past, gaining access to your credit score meant subscribing to pricey and often unnecessary credit monitoring services. However, many companies have made strides in bringing a level of credit score visibility to consumers that only financial institutions used to enjoy.

Since your FICO score is the one most often used by lenders, it’s the score you should be most interested in monitoring. There are a handful of sources you can rely on to provide your FICO score each month at no cost, such as credit card issuers and banks. For instance, Bank of America offers free FICO scores in partnership with TransUnion. Wells Fargo offers free FICO scores in partnership with Experian.

If your bank doesn’t offer free FICO scores, it likely offers free VantageScore scores. Again, VantageScore isn’t relied upon by lenders nearly as often as FICO is, but it does follow a similar scoring model and will give you an estimate of your credit score. For example, Chase, U.S. Bank and Capital One all provide VantageScore 3.0 scores through one of the three credit bureaus.

There are a number of websites and apps that also provide free credit scores, the most well-known of which is Credit Karma. This site provides both credit reports and VantageScore 3.0 credit scores from TransUnion and Equifax.

With so many types and sources of credit scores, working toward good credit might feel overwhelming. However, if you take a step back and focus on the basics, you can grow your credit score without too much thought.

“Even though there are many different credit scoring models that generate a variety of scores, these different models generally consider similar factors,” says Ganotis. “My advice for people who want to maximize their credit scores is to focus on the fundamentals of good credit instead of obsessing over slight fluctuations in points on a specific credit score you’re monitoring.” If you do this, he says, you should see your credit score go up over time.

Based on the five factors that impact your FICO score, these tips can help you build good credit over time:

Credit scores might be complex, but sound money management doesn’t have to be. By paying your bills on time, spending wisely and only borrowing what you need, you should see your credit score soar.