Credit Score Q&A

Is there anything more elusive in personal finance than your credit score? Well ... maybe taxes or the stock market have it beat, but credit scores can appear to be very mysterious. Who decides the score? What contributes to it? How can you improve it? And, most mysterious of all, why a scale of 850 rather than an even 1,000?


Your credit score can have a big impact on your financial life, so let’s demystify it. Here are some of the most important things you need to know:


  • Q: What is a credit score?
    A: It’s a three digit number ranging from 300 to 850. According to the Consumer Financial Protection Bureau (CFPB), “Your credit score predicts how likely you are to pay back a loan on time.” Credit scores are used by lenders to make decisions about whether to offer you a mortgage, auto loan, or credit card, and at what terms. Credit scores may also be used to evaluate your application for an apartment/home lease or even a job.


  • Q: Who decides them?
    A: Credit bureaus compile credit scores and credit reports. While there are many credit bureaus in the U.S., three major ones dominate the industry: Equifax, TransUnion, and Experian.


  • Q: What’s the difference between a credit report and a credit score?
    A: Your credit report is a detailed breakdown of your credit history, which is used to calculate your score. Your credit report will include personal information and loan history, and detail about when accounts were opened, balances carried, payments made, and credit limits. It may also include information about credit inquiries, bankruptcy, or collections. Curious to learn more? Experian has a detailed guide to understanding your credit report.

 

  • Q: What makes up my credit score?
    A: While there are a few different types of credit scores, the most popular is the FICO Score, so that’s the one we’ll focus on. According to myFICO, these categories each contribute to a specific percentage of the score: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%). The “amounts owed” category looks at your total debt, but it also focuses on “credit utilization” on revolving debt accounts like credit cards. Financial experts generally recommend never going above 30% credit utilization; in other words, not using more than 30% of the credit available to you. However, for a really excellent score, it’s best not to go above 10%. The “new credit” category is concerned with opening too many new accounts, or having too many credit inquiries in rapid succession. Finally, “credit mix” refers to having a combination of revolving accounts (like credit cards, retail store cards, or gas station cards) and installment loans (like mortgage, auto loan, or student loans). While having a mix can be helpful to your score, since it only factors into 10%, don’t feel like you need to add credit just to increase this section. Note: Another scoring model that’s gaining popularity is the VantageScore.


  • Q: How can I safely access my score?
    A: It’s imperative you receive your score data from a trusted source. You shouldn’t have to pay for your score, and many free sources give you your score in exchange for selling your personal information. Start by looking at the places where you already store financial data, like your bank or primary credit card. Currently, I can access my score through my credit union, one of my credit cards, and Mint. You can also access your score when you’re applying for significant credit (such as buying a car or renting an apartment) since anytime your credit is pulled you can ask for a copy of what they found. Note: It’s free to pull your credit report once a year from each of the three major credit bureaus.


  • Q: How do I know if my score is good?
    A: According to FICO, 800-850 is considered exceptional, 740-799 is considered very good, 670-739 is considered good, 580-669 is considered fair, and 300-579 is considered poor. VantageScore is a little different: 781-850 is excellent, 661-780 is good, 601-660 is fair, 500-600 is poor, and 300-499 is very poor.


  • Q: Will getting a credit card and/or keeping a balance on my card increase my score?
    A: Getting a credit card will actually temporarily lower your score since you’re adding in a new form of credit. Keeping a balance on your card from month to month can also lower your score. A credit card can be beneficial if you need to add a new type of credit to your mix and you use and pay it off each month (taking advantage of no more than 10% of the credit available to you). However, raising your credit score shouldn’t be your only reason for getting a credit card. It will take time for the credit card to help your score.


  • Q: Why does my score fluctuate so much?
    A: Your credit score is continually changing because it’s a “moment in time” snapshot of your credit. Creditors update their information once a month, but every creditor differs in the time of the month when they share it. Similarly, each credit bureau differs in how they sort and score data. And since credit reports only reflect 7 years worth of data (10 years for bankruptcy), certain things will fall off your credit report each month impacting your score.