Your credit score is a number that is calculated by credit bureaus in order to estimate your creditworthiness. Lenders use this score when reviewing your application for credit to help them determine your risk profile, and your likelihood to repay any debts.
The goal of a credit score is to forecast your future behavior using past data. Higher scores, which can be driven by financial responsibility over time, indicate less risk to a lender. On the other hand, people with lower scores represent higher risk and tend to receive higher interest rates as a result. These higher interest rates are used to compensate lenders for the higher probability of default, or an eventual failure to repay a loan.
Who are the main credit bureaus?
The three main credit agencies in the U.S. are TransUnion, Equifax, and Experian. All three credit bureaus use credit scoring models to compute your credit score, but each bureau uses a different model for different kinds of lending.
The two biggest companies responsible for developing these models are FICO and VantageScore. FICO was created in 1989 by Fair Isaac Corp, and VantageScore was created in 2006 as the result of a collaboration between TransUnion, Equifax, and Experian. Both FICO and VantageScore are on a scale of 300 to 850. They also use the same behavioral data, but they weight individual factors differently.
Why do I have multiple credit scores? Why are my credit scores different?
Not only do two primary credit scoring companies exist, but also each company has developed a number of versions or updates to their models. For instance, the newest FICO credit scoring model is the FICO Score 10 Suite, and the latest tri-bureau scoring model from VantageScore is VantageScore 4.0.
Further, each bureau has slightly different underlying data sets. Creditors and lenders have to pay to report information to the bureaus, and as a result many companies choose to only use one or two of the services.
Consequently, even if all three bureaus were using the same version of the same credit scoring model, they would likely still produce different credit scores for an individual depending on what historical data they had.
Which credit score is most important?
Between the three different data sets, two main models, and all of their updates, you have many credit scores. Possibly hundreds.
Unless these credit scores are drastically different, in which case you may benefit from disputing any errors on your report, there isn’t one score that’s more important than the rest.
It’s estimated that in the U.S., lenders use FICO in 90% of decisions. But VantageScore is a much newer model and its usage has grown considerably. In fact, 9 of the 10 largest banks now use VantageScore for at least some lending decisions.
It has become clear that lenders view credit scores, and the differences between them, as context specific. Because it is at the lender’s discretion which model and which version to look at, we see different usage depending on the financial product. For example, a mortgage application may rely on an older version of FICO whereas a consumer site may use the latest version of VantageScore. This is because FICO requires 6 months of credit history for an account to be included in your credit score report. VantageScore, on the other hand, has only a one month minimum and thus updates to changes more quickly.
How is my credit score calculated?
The five key factors in the calculation of your credit score
- Payment history – Payment history accounts for about 35% of your credit score. This biggest factor as it helps determine your reliability in the eyes of a lender. Timely consistent payments will boost your score, and missed payments will ding you. As with other factors, more weight is given to recent actions so over time the impact of missed payments will fade.
- Credit utilization – Credit utilization accounts for about 30% of your credit score. This calculation looks at the percent of the total credit available to you that are you actively using. The denominator in the calculation is the sum of the credit limits on all of your revolving (not fixed) debt, such as credit cards, lines of credit, etc. And the numerator is the sum of all of your statement balances on these debts. The popular rule of thumb is to keep your credit utilization below 30%. According to Experian, average utilization over the past two years is about 25%.
- Credit age – Credit age accounts for about 15% of your credit score, and is based on the age of your oldest account. A long, established credit history makes lenders more comfortable with your risk profile. For this reason, it’s generally advisable to not close old accounts unless you have a compelling reason to do so.
- Credit mix – Credit mix accounts for about 10% of your credit score, and highlights your financial responsibility with different types of debt. While there is no ideal credit mix, having some history with different credit cards, personal loans, other types of debt will raise your score.
- Credit inquiries – Credit inquiries account for about 10% of your credit score. There are two main types of inquiries, hard and soft. Hard inquiries are the result of formal applications for new loans or credit. Soft inquires occur when you pull your own credit, a potential employer or existing lender run your credit, or a lender performs a pre-screen. Both types of inquiries remain on your credit report for two years, but only hard inquiries have a negative impact on your credit. FICO reports that a hard inquiry will typically reduce your credit score by 5 points or less and this penalty will start to fade after just a few months. The theory behind this factor is that constantly seeking out additional lines of credit may indicate financial trouble. Fortunately, most models weigh multiple inquiries for a given financial product in a short time frame as a single inquiry. Depending on the scoring model, this allows you 14-45 days to shop around.
Factors that are not included in the calculation of your credit score
- Bill payments – While you can elect to proactively report your own payment history, bill payments are not usually reported to credit bureaus. Any bills that are sent to collections, however, can have a significant negative impact on your credit.
- Taxes liens – Tax liens and court judgments no longer appear on credit reports. All three major bureaus enacted this change in the spring of 2018.
How do I get a credit score? How do I become eligible for a credit score?
In order to get a credit score from FICO, you need to establish and maintain a tradeline (credit card, loan, line of credit, etc.) for at least 6 months and this tradeline must show some activity.
To be eligible for a credit score from VantageScore, you simply need to establish a tradeline long enough for credit bureaus to become aware. Because of the more liberal policy on account age and activity, more people qualify for a VantageScore than a FICO score.
How low does your credit score start?
Although credit scores range from 300 to 850, it’s unlikely your credit score will start at 300 unless your credit is initiated with numerous derogatory remarks. More likely your first score will begin around 500 but can range “well into the 700s,” according to credit expert John Ulzheimer.
After working at both FICO and Equifax, Ulzheimer found that “the only correlation between your first score and the scoring metrics would be the age of your credit file. But that category is only worth about 15% of the points in your score, so even if you bombed that category and did well in the others, you’d still score well above 640.”
How to improve your credit
To improve your credit, focus on improving the five key factors that are used to calculate your credit score. Always make timely payment, strive to increase your available credit over time, keep your oldest accounts live, develop a mix of credit types, and minimize your credit inquiries in the months leading up to an important credit event.
Does increasing my credit limit affect my credit score?
Increasing your credit limit will benefit your credit score over time. Assuming your total spend remains consistent, having larger credit lines will reduce your credit utilization, which is the second largest factor in determining your credit score.
However, if increasing your credit limit requires a hard inquiry, then your credit can see a short-term decline. But the impact of the inquiry will fade within a few months, and the benefit of your increased credit line will remain indefinitely.
How to request a credit line increase
Many lenders allow you to request a credit line increase online, and often times the request is processed instantly. In other cases, you might have to call the number on the back of your credit card and ask to speak with a customer service representative.
In either case, prior to requesting a credit line increase, it’s strongly recommended that you make consistent payments for at least 12 months and keep your balance low. Most lenders require 6 to 12 months of on-time payment history, and high balances may indicate financial distress. A failure to take these actions may result in your request being rejected.
Is a 720 a good credit score? Is 730 a good credit score?
In 2021, the average FICO score in the U.S. was 716, which is seen as good.
Here are the FICO score ranges:
- Poor: 300 – 579
- Fair: 580 – 669
- Good: 670 – 739
- Very Good: 740 – 799
- Exceptional: 800 – 850
In 2021, the average VantageScore in the U.S. was 695, which is seen as very good.
Here are the VantageScore ranges:
- Poor: 300 – 499
- Fair: 500 – 600
- Good: 601 – 660
- Very Good: 661 – 780
- Exceptional: 781 – 850
How long does a repo stay on your credit? How long does a collection stay on your credit report?
Here is how long various derogatory marks remain on your credit reports:
| Hard inquiries | 2 years |
| Money owed to the government | 7 years |
| Late payments | 7 years |
| Foreclosures | 7 years |
| Short sales | 7 years |
| Collection accounts | 7 years |
| Chapter 13 bankruptcies | 7 years |
| Judgments | 7 years, or until the statute of limitations expires. Whichever is longer. |
| Unpaid taxes | Indefinitely, or 7 years from the last date paid. |
| Unpaid student loans | Indefinitely, or 7 years from the last date paid. |
| Chapter 7 bankruptcies | 10 years |
Most negative items will fall off your credit report seven years from the date of your first missed payment. This doesn’t mean your credit will be damaged for seven years though. If you otherwise use credit responsibly, your credit score may start to recover from a derogatory remark within three months to six years.
If a negative item is still on your credit report after seven years, you can contact the credit bureau directly and ask to have it removed.
