02.06.2024 By Amy Miller, AFC

What is a Credit Score?

We all know credit is important when applying for a home mortgage, auto loan, or credit card, but many are surprised to learn that employers, utility companies, and insurance agencies also check credit to determine how you pay your bills and if you are hirable or insurable.

Our credit score is a 3-digit number that represents our financial reputation and has a huge impact on our finances and many other aspects of our daily lives. 

We all know credit is important when applying for a home mortgage, auto loan, or credit card, but many are surprised to learn that employers, utility companies, and insurance agencies also check credit to determine how you pay your bills and if you are hirable or insurable. 

Good credit can open doors. Unfortunately, poor credit can limit your buying power, job opportunities, and can lead to unnecessary expenses like higher interest rates and fees when borrowing.

Understanding how your credit score is created can help you build better credit and save money.

Here’s what you need to know:

What is a Credit Score?

Credit scores are generated based on information gathered from the three major credit reporting agencies in the U.S. – Equifax, Experian, and TransUnion (known as “The Big Three”). Lenders and creditors have to pay to report and must follow the regulations set by the Fair Credit Reporting Act. This often results in many smaller lenders only reporting to one or two, which is why it is important to regularly check each of your three reports.

The Big Three collects this information and then submits it to one of two companies that will generate your credit scores using the many credit scoring models they each offer.  

FICO Scores

The Fair Isaac Corporation introduced the first FICO scoring model back in 1989 and forever changed the way credit decisions are made. FICO scores streamlined the buying and credit process by offering lenders a quick glimpse or summary of someone’s creditworthiness and likelihood of paying the loan back. FICO was quickly adopted by lenders across the country and is still used in around 90% of all credit decisions today.

FICO routinely updates its scoring models and has created industry-specific models for autos, credit cards, and home loans. There are currently around 16 versions of FICO used in the U.S., with the FICO 8 being the most common and widely used score for personal lending.

FICO scores range from 300 to 850 and are calculated using information reported from the credit bureaus in the five categories we’ve broken down for you below - click on each to hear segments from our team’s interview with FICO Vice President, Tom Quinn where he provides an explanation of each:  

35% Payment History                                        

30% Outstanding Debt

15% Credit History

10% New Credit  

10% Credit Mix

 

Watch our team discuss what a credit score is made of with FICO Vice President, Tom Quinn here. 

FICO Credit Scores fall in the following ranges:  

Super Prime (Excellent) 800+                 High likelihood of approval with best rates & and terms

Prime (Very Good)         740-799            Appears very dependable and trustworthy to lenders  

Prime (Good)                670-739            Good rates & terms

Near Prime (Fair)           580-669            Reasonable or good rates and terms

Subprime (Poor)            300-579            Denied or approved with high rates and unfavorable terms

VantageScore

The VantageScore was created in 2006 by “The Big Three” to compete with FICO. Like FICO, VantageScores uses the information in your credit report to generate a three-digit number designed to reflect your credit history and the likelihood that you will repay the loan on time. The first two versions of VantageScores ranged from 501-900 and corresponded to a letter A - F, like grades in school. The most recent version, VantageScore 4.0, was released in 2017 with ranges from 300-850 and do not correlate to a letter grade.  

 

VantageScore 4.0 is calculated based on the following categories:

40% Payment History                                                   

20% Depth of Credit

20% Credit Utilization

11% Balances

3% New Credit

2% Available Credit

 

VantageScore 4.0 scores Fall in the following ranges: 

Super Prime (Excellent) 750-850            High likelihood of approval with best rates & terms

Prime (Good)                700-749            Very Good rates & terms

Near Prime (Fair)           650-699            Reasonable or good rates and terms

Subprime (Poor)            540-649            Denied or approved with high rates and unfavorable terms

Subprime (Very Poor)    300-549            Denied or approved with high rates and unfavorable terms

 

How to Check Your Score

Knowing your score is an important step in the journey to overall financial wellness. Understanding where you stand will help you be better prepared to determine your next steps.

Checking your credit report is different than checking your score and it’s important to know that reports and scores are updated regularly and can vary month to month based on your activity and balances.

Start by visiting AnnualCreditReport.com and check each of your reports with Equifax, Experian, and TransUnion. All U.S. consumers are allowed to check their full report from each of the three agencies once per year for free. This is the only verified site to gain free access to all three in one place.

Unfortunately, the site does not provide free scores but each of the three credit bureaus offers services that will provide different versions of your FICO score; however, subscription fees may apply.

There are also many free monitoring services available online. However, most of them only provide the FICO 8 score or the VantageScore 4.0 and charge additional fees if you would like an industry-specific score that would be used when purchasing a home or automobile.

 

Make a commitment to save money, reduce your debt, and begin building wealth. Take the America Saves Pledge and choose your savings goals. We’ll send you tips, tools, and resources to help you be successful! Think of us as your savings accountability partner!  

 

 

 

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