Credit scores have become an essential part of leading a successful life in the U.S. This may come as a shock, but some people don’t know that credit scores are not part of your credit report. They are a separate product that uses the information contained in your credit report, with a few exceptions, to calculate a number that represents your likelihood of defaulting on your next loan.
What impacts your credit score?
While there are many scores out there, we will be focusing on FICO and VantageScore for this exercise. If you are in the market for a new credit card or need to know what your score is for another reason, you will probably be interested in one (or both) of these scores. Understanding how those scores are calculated will help you get to the score you want.
Let’s look at FICO first:
Payment history is the number one factor, counting for 35 percent of your total score. Payment history shows if you have paid on time and as agreed. It also includes the number and severity of any late payments (30, 60, 90 days late), the amount past due and whether you eventually repaid accounts. Paying on time every time will put you well on your way to earning a good score. But other factors are important, too.
Credit utilization comes next at 30 percent of your score. Simply put, this measures how much of your total credit limit you have used. For example, if you have a credit card with a $1,000 limit and you have a balance of $300, you have used 30 percent of your available credit. One thing to note about this factor—each of your accounts will be counted individually and as a group. So, if you have several credit cards, it’s good to know your utilization rate on each card.
Common advice recommends you keep your utilization below 30 percent. But consider that a neutral point. To build your score, I suggest 25 percent or less. Ideally, you should pay off your card balances each month: Leaving a balance doesn’t help your score. And, remember, people with the highest credit scores often have utilization rates in the single digits.
Credit history counts for 15 percent of your FICO score and looks at how long you have been using credit. Unfortunately, you don’t have much control over this factor. Your accounts can only be as old as they currently are. Accounts that have been open for at least two years will help your score.
One way you can give it a nudge is by being added as an authorized user on someone else’s older account. This is used mostly by parents who want to give young adults a bit of a leg up. Remember, having a limited credit history alone does not mean you will have a bad credit score. Those other four factors account for 85 percent of your score, and those are up to you.
Credit mix looks at the types of credit you have and counts for 10 percent of your score. There are basically two types of accounts—revolving and installment. Revolving accounts are mostly credit cards or lines of credit, while installment accounts can include auto loans and mortgages as well as personal loans.
A lender will usually give greater weight to your performance on the type of loan you have applied for. So a credit card issuer looks at your experience with other cards more closely. Having a healthy mix of both types of accounts will earn you the most points in this category.
New credit makes up the final 10 percent of your total FICO score. You may have read the previous paragraph and thought, “I need to up my credit mix.” While that might be true, be very careful here. Any inquiry for new credit or a line increase will stay on your credit reports for two years. A high number of inquiries in a short time has a negative effect on your score. So you should only apply for new credit when you need to, not just because you want to.
The latest version of VantageScore calculates its score a little differently, using an “influential” scale to determine the importance of each factor. Counted as “extremely” influential are total credit usage, balances and available credit. “Highly” influential are credit mix and experience. Payment history is “moderately” influential, while age of credit history and new accounts are “less” influential.
There are a couple of other key differences between FICO and VantageScore. While both access credit reports, FICO will only use one bureau’s report to calculate a score. This means your scores might be different from Equifax, Experian or TransUnion, depending on which report was pulled to get your score. VantageScore uses all three reports to calculate its score. Also, FICO needs at least one account to be opened and updated at least once over six months to generate a score while VantageScore can calculate a score after just one to three months of activity.
The latest version of FICO (10T) and VantageScore 4.0 use trended data, but right now it might not show up in your FICO score, since most issuers haven’t switched to the latest version of FICO yet.
What credit score do you need to get a credit card?
It depends on the card. FICO ranks scores from poor to exceptional:
- Poor: 300 to 579
- Fair: 580 to 669
- Good: 670 to 739
- Very good: 740 to 799
- Exceptional: 800 to 850
VantageScores have a similar ranking:
- Very poor: 300 to 499
- Poor: 500 to 600
- Fair: 601 to 660
- Good: 661 to 780
- Excellent: 780 to 850
Can you get a credit card with limited or no credit history?
There is a credit card out there for just about anyone with just about any credit score. But the cards available to lower-scoring consumers will not come with the best rates or terms.
Cards for poor to fair credit
But everyone has to start somewhere. I like retail or gas cards as a starter, because they are generally easier to qualify for. If you have reportable, regular income that can be verified, you can probably get one of these cards. Using a card like this judiciously can be a great way to get positive data into your credit reports.
You can also consider a secured credit card. Secured cards look and function just like any other card, but you will have to “secure” the card’s spending limit with your own money. Your security deposit will be kept in an FDIC insured account so it will be safe. But if you don’t pay, you’ll lose your deposit. One word of caution here, though: before you sign up, be sure that the card will be reported to the credit bureaus—not all are.
Cards for good to excellent credit
If you have a credit score in the good to excellent range, you will likely be able to qualify for a card that earns you rewards for your spending. However, not all rewards cards (or issuers) have the same credit requirements, so it’s still a good idea to do some research before you apply.
For example, the Chase Sapphire Reserve® has excellent rewards and comes with multiple perks. But this $550-annual-fee card is generally available only to those with excellent credit. Meanwhile a typical no-fee cash back card is likely accessible to anyone with good or very good credit.
No matter your score, the CardMatch tool can give you an idea of which cards you can qualify for.
How to estimate your credit score
MyFICO.com has a handy calculator that asks some basic questions to help you estimate your score. You might even be able to answer the questions this calculator asks without pulling a credit report depending on how well you know your current financial situation. You may also be able to access your score through your financial institution or with one of your current creditors. Many credit card issuers offer free reports and scores as part of their benefits package.
Many websites also tout free scores. The score you get may or may not be a FICO or VantageScore or a current version of either. The number you get from the bureaus, a credit card company or a website won’t match the one your lender has, but that’s OK. The score will be different depending on which score, version and credit report are used. Even if the numbers are different, they almost certainly point to the same risks, and that’s what really counts. A good score is a good score regardless.
The bottom line
If you have a specific card in mind, you can check on their credit score requirements to see if you think you might qualify. While nothing is set in stone, it is good to have an idea of what you are aiming for. A fair to good score will not likely score you the very best card out there. If you can’t qualify for the card you want, a lesser card will still help you build your score up. With some patience and good scoring habits, you’ll soon qualify for the best of them!