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Credit score

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.

Deeper definition

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.

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