Podcasts are a convenient way for savers to boost their personal finance knowledge.
Credit scores are a key financial concept you need to understand. Bankrate explains.
What is a credit score?
A credit score is a number that represents a person’s creditworthiness. Credit scores are based on a variety of personal financial data. Higher credit scores correlate with better creditworthiness. Financial institutions judge people with higher credit scores to have lower credit risk, and grant them a broader selection of credit products at lower interest rates. Fair Issac Corp. (FICO) and VantageScore Solutions are the two leading U.S. credit scoring companies.
Fair Isaac Corp. originated the concept of the credit score — what it calls a FICO score — in the 1950s. Fair Isaac’s insight was to offer financial institutions a view of the creditworthiness of their customers via a simple numerical grade, with 300 the lowest credit score and 850 the best. The company claims that 90 percent of top U.S. lenders use FICO scores to make their decisions.
VantageScore Solutions is a joint venture between three leading credit bureaus: TransUnion, Experian, and Equifax. Each borrower’s VantageScore credit score is generated using information about credit payment history (35 percent of the weighting), total debt load (30 percent of the score), length of credit history (15 percent), new credit (10 percent), and mix of credit, such as revolving credit or fixed-payment loans like a car payment (10 percent).
Different lenders have different needs for information about the credit risk and creditworthiness of their customers. Credit bureaus issue different credit scores using only certain aspects of a person’s financial history to evaluate risks for specific needs, such as a car dealer or mortgage lender. Companies like Fair Isaac and VantageScore Solutions offer more than one score for you.
A credit score can change on a regular basis as people pay down a credit cards, pay off loans, and open new lines of credit. People who want to track their credit scores often sign up for credit reporting services; some of these services update credit scores monthly, while others update them more frequently.
Credit score examples
FICO scores and VantageScores range from excellent to very poor:
- Excellent: FICO = 800-850; VantageScore = 750-850
- Very good: FICO = 740-799
- Good: FICO = 670-739; VantageScore = 700-749
- Fair: FICO = 580-669; VantageScore = 650-699
- Poor: VantageScore = 550-649
- Very poor: FICO = 300-579; VantageScore = 300-549
Want a better credit score? Pay down your debt. Use our calculator to figure out your debt-to-income ratio, then plan your payoff strategy.
More From Bankrate
5 min read May 24, 2022
These 10 money-themed books can help you improve your finances.4 min read May 13, 2022
There are many ways scammers can steal identities and use them for gain, usually of a financial nature.4 min read May 06, 2022
A significant portion of Americans experience financial worries.5 min read May 02, 2022
Identity theft is a term that covers a variety of crimes in which someone steals another person’s personal information.5 min read Apr 29, 2022
Look for a plan with a reputable provider that offers services that make you feel confident.5 min read Apr 29, 2022
If you discover the breach early and act without delay, you could minimize the damage.4 min read Apr 29, 2022
Here’s a breakdown of where identity theft occurs most often, according to FTC data.5 min read Apr 29, 2022
Stay alert and don’t think identity theft can’t happen to you.5 min read Apr 29, 2022