Ultimate Guide to Your Credit Score: Definition, Score Ranges and Improvement Tips

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If I asked you what your number is, you might thing of something altogether different from a credit score. But never-the-less, there are few numbers more financially important than your credit score.

Here are some details on understanding credit scores, the meaning, calculation and tips to improve it.

What is a Credit Score?

So what exactly is a credit score? A credit score is just a standard three-digit number, usually between 300 and 850 that gives a ranking on your credit and credit risk.

It tells creditors and lenders how likely you are to pay your bills on time and whether you are safe to lend to. The meaning of credit score numbers in your financial life is significant.

Your credit score can either better or worsen your chance of securing a loan or getting a credit card as it demonstrates how reliable you will be in repaying your debts to the lenders.

It can also determine what type of interest rate you can get which in turn can save you money on everything from houses to cars.

It is important to be aware of credit score ranges so that you can gauge the condition of your credit and if it needs any fixing. However, knowing the elements that determine your credit score is what will show you how to improve them in the long term.

To see your credit score, download the Credit Karma app which helps you keep track!

There are 3 major credit bureaus that keep track of your credit history and calculate your score: Equifax, Experian and TransUnion.

What is a Good Credit Score?

You may already know that a higher credit score can change things. It can make getting personal loans, auto loans and credit cards easier.

But, more importantly it can get you lower interest rates on new accounts including mortgage loans. A lower interest rate on a mortgage loan can save you thousands of dollars over the life of the loan.

So what is considered a good credit score? And what is a bad credit score?

Here are the credit score ranges to know:

• Excellent: 800–850
• Very Good: 740–799
• Good: 670–739
• Fair: 580–669
• Poor: 300–579

If you don’t know what your number is you can get a free credit score and credit report from any of the three credit bureaus: Experian, TransUnion or Equifax.

Here is some more official information on getting your free credit scores and reports.

More reading:

• Credit Saint vs. Lexington Law
• Best Credit Building Apps

How is My Credit Score Calculated?

There are 3 main consumer credit bureaus: Equifax, Experian, and TransUnion.

These credit bureaus produce credit reports for each individual in which they gather information obtained from creditors, credit card companies, as well as other financial institutions.

In order to understand all this data, you must first know which factors contribute to credit scores. The credit bureaus use scoring models like VantageScore or FICO, (Fair Isaac Corp.) that generate numbers based on your credit history and usage.

The VantageScore and FICO models have different definitions and weight factors when calculating your credit score.

Though the formulas used in each credit scoring model differ, they all mainly consider the same kind of credit information.

Your credit score is calculated based on your repayment history, debt utilization, how old you credit accounts are, what type of credit mix you have and even how many new accounts you have opened.

Both credit scores fall within the range of 300 to 850, but their classifications can vary.

Understanding your credit score within the FICO and VantageScore ranges will help you know if you can qualify for a loan or credit card and what interest rate you can get.

The Components of a Credit Score

Here is a more detailed beak-down on the FICO credit scoring model and what factors determine a good credit score from a bad one.

Credit payment history (35%)

The biggest factor in your FICO score is your payment history which accounts for 35% of the calculation.

This information reveals if you make payments on time or not, how many days beyond the due date you pay your bills, how often you miss payments, and how recently payments have been missed.

Your lenders will report 30-day late payments, and it will drop your credit scores. An increase in the number of on-time payments results in an increase in your score.

Fresh loans might keep your score down initially because they carry very little repayment history. In contrast, the loans that are closer to being paid off increase the score because they display a successful payment history.

Whenever you fail to make a payment, your credit score dips so try to always make your payments on time and keep your credit history positive.

Amounts Owed (Credit Utilization) (30%)

30% of your credit score is based on something called your credit utilization or debt-to-credit ratio. This is just the percentage of revolving credit you are using compared to how much available credit you have.

Revolving credit is used to refer to accounts like credit cards. Mortgages and other fixed loans are called installment credit or installment accounts.

It is based on the total balance that you owe and the total amount of credit that is available. High credit card balances would hurt your credit score. Conversely, even paying smaller balances on time would help your credit score.

The best credit usage percentage to have in the eyes of lenders is just 30%. An example would be if you have a credit card with a maximum amount you can borrow of $1,000 buy your credit card balance is only $300.

Credit History Duration (15%)

Your score is likely to be higher if you have been consistently paying on time for a while and have a long credit history.

Scoring models that estimate credit history, in most cases, use the length of the credit account. So it’s better not to close your older accounts since this can affect your score negatively.

It might sound rational to not apply for credit or to remain debt-free, but that can also have an impact on the score because lenders won’t be able to assess whether you are responsible with credit.

Keep old accounts open even if you don’t use them as it will provide you with higher credit scores.

Credit Mix and Account Types (10%)

Having a range of accounts, such as installment loans, mortgages, and different types of credit cards, can positively impact your score.

Credit Actions and New Accounts (10%)

If there has been a surge in account openings or applications for accounts, it might indicate financial instability and could lead to a decrease in your score.

However, recent credit scoring models are designed to understand better how recent loan activities do not necessarily signify risk on the part of the consumer.

Why Does a Good Credit Score Matter?

Having good credit makes reaching your financial goals much more manageable and keeps things less stressful.

It can be the deciding factor between approval or denial for that crucial loan and can directly affect the interest or other fees you’ll have to pay if approved. A good score means you could save a lot of money!

Lenders in the United States use a practice called risk-based pricing or “RBP.” RBP typically means that the lower the risk you present, the less money the lender needs to charge you to subsidize the risk of doing business with you.

Conversely, the higher the risk you present, the more the lender needs to charge you to subsidize the risk of doing business with you. That’s why applicants with the best credit scores get the best deals, and those with the worst credit scores get the worst deals.

Borrowing aside, credit scores affect many non-lending decisions, too, such as whether a landlord will rent an apartment to you. Credit scores work in many areas of your life!

In addition to that, some employers may review your credit reports before making hiring or promotion decisions.

How to Improve Your Credit Score

If your score leaves a little bit to be desired, you might be looking for tactics to boost it. Here are some tips and tricks for improvement.

More reading: How Long Does Credit Repair Take?

Make on time payments

Focusing on the factors that affect credit rating can considerably improve your credit scores. Using that as a guide, here are some tips for boosting your score.

You should avoid penalties in your credit reports by making sure to regularly pay the minimum payment due by the due date. Keep track of all your outstanding debts.

It only takes a single missed payment that exceeds thirty days for it to appear on your credit score, which will be recorded on your credit report for no less than seven years. Set up automatic payments to make sure you don’t forget.

Keep your balances low

To ensure a good score, you must maintain low balances and a low credit utilization rate on your credit cards.

The so-called utilization rate refers to the amount of your current balance in a revolving account like a credit card, compared to its credit limit. It is one of the most important components that contribute to scoring; having low rates may be a contributing factor to your scores.

Get accounts that report to each credit bureau

Get credit card accounts and lines from financial institutions that report to the three credit bureaus. You need to make sure that if you have only a few tradelines (accounts), they are showing up in your credit report.

Try to keep your accounts open even if you are not using them. The length of credit history is a factor in calculating your credit score and can positively impact your credit health.

Consider Adding Authorized Tradelines

You may have heard of something called a tradeline. It is basically a fancy word for a credit account.

Adding a positive one to your credit history can help boost your score. You can get added to a friend or family member’s credit account as one way to do this.

Another option is to actually purchase a tradeline. Check out this list of the 5 best tradeline companies.

Leverage a Credit Repair Service

If you have some real credit damage, you might be able to benefit from credit repair. There are a lot of companies out there that can provide support for this.

For example, if you have any fraudulent accounts or inaccurate information on your credit report, they can work to get these items removed.

Here is a list of the 7 best credit repair companies to choose from.

More reading: Lexington Law Firm Review

Don’t over apply for new credit

Apply for credit only if it is absolutely needed. While it is a good to have a positive credit mix, constantly trying to open new credit will harm your credit scores.

If you’re having trouble keeping your score within a desirable range, consider taking a course on personal finance management. Getting better with your finances can improve not just your credit, but also other aspects of your life.

Final Thoughts

Credit scores influence many things in your financial life. Now that you know what they are, the factors that affect your score and how to raise your number, get started with improving it!