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A higher credit score often indicates a lower risk for creditors. Lenders and other institutions rely on your credit report to shed light on your financial history and ability to repay debt. Your score is a numerical expression based on the information in your credit report. A credit score scale is used to determine where you credit score ranks. There are two different credit scoring systems used by credit bureaus.
What Impacts Your Score
Creditors report your payment history to credit bureaus. Not everyone you pay on a recurring basis reports positive activity to bureaus. For example, your cell phone provider and utility companies only appear on your credit report if you do not pay as agreed. Your credit score is also affected by how you use your credit. Your credit utilization ratio is the amount of debt you carry compared to your credit limits. To increase your credit score, keep your credit card balances low. Since creditors do not reveal when they report to the bureaus, paying off your balance in full at the end of the billing cycle does not necessarily have a positive impact on your score. Other factors that affect your credit score include inquiries, the length of time the accounts have been open and the type of credit you have. Too many credit cards or too many loans can lower your score. You need a balance of both credit cards and loans.
FICO stands for Fair Isaac Corporation -- an organization that calculates and publishes consumer credit scores. According to CBS News, more than 75 percent of mortgage lenders and 80 percent of the largest financial institutions rely on FICO data for information in processing applications. FICO scores range from 300 to 850; the higher your score, the better. Your payment history is 35 percent of your score. Your utilization rate is 30 percent of your score. Length of credit history accounts for 15 percent, new credit is 10 percent and type of credit accounts for 10 percent. Credit inquiries fall into the new credit category. In July 2012, the average FICO score in the United States was 664. The median credit score was 723. To obtain approval for a conventional mortgage loan, most lenders prefer a credit score of at least 620. Typically, bad credit is a score below 579. With a score of 580 to 619, you increase your chances of credit approval but likely will have high interest rates. If your score is between 620 and 679, your credit is considered average. A good credit score is 680 to 719, and people with such scores can expect an increased chance of credit approval with lower interest rates. A score above 720 is viewed as excellent and is associated with the best rates and repayment terms.
Credit bureaus also use another credit scoring product called the VantageScore. Consumer scores can range from 501 to 990 by this scale. According to TransUnion, an "A" rating is between 900 and 990. A "C" rating is from 700 to 799. The largest portion of your score, 32 percent, is determined by your payment history. Your credit utilization ratio is 23 percent. Your credit balances are 15 percent. The length of your credit history is 13 percent, new credit is 10 percent and your available credit is 7 percent.
Scores From Each Bureau
Creditors report to the three major credit bureaus: Equifax, Experian and TransUnion. However, your lender may not necessarily report to each bureau or may report data at different times of the month. It is not uncommon to have a 50-point difference among ratings. When applying for a mortgage or auto loan, the lender may pull your credit report from all three bureaus to get your median credit score. Other creditors may process an application using only the information from one bureau. To ensure an accurate credit score, monitor your report from all the bureaus annually. Check for discrepancies or reporting errors.
- CBS News: Understanding Your Credit Score
- Credit Reports 101: Average FICO Score
- The Truth About Mortgage: What Credit Score Do I Need to Get a Mortgage?
- TransUnion: VantageScore -- Consistency in Credit Scoring
- Business Week: Anatomy of a Credit Score
- MyFICO: What's in Your Score
- Free Score: Good, Average and Bad Credit Score Range