Do you know your credit score? Did you know you have more than one? Do you know what makes a good credit score or how they’re calculated? Lenders and creditors know, and you should, too.
Knowing your credit score could help you save money on mortgage loans, credit cards, auto insurance, and other personal finance items. Not knowing your credit score can cost you, in terms of time and money.
As you can probably guess, when it comes to credit scores, the higher, the better, though a good credit score ultimately depends in part on what credit score you’re looking at. There are many different types of credit scores. We each have dozens of them. These days, most of the widely used credit scoring models—including FICO?—use a range of 300-850, with 300 being the worst score and 850 being the best. And whereas for most of us, the term “good” means acceptable or OK, in the world of credit scores, it means something very specific.
Notice how “Good” is in the middle? It doesn’t just mean OK in this context. It means you have a FICO score somewhere between 670 and 739. Again, the higher your credit score, the better, because a higher score can help you save money through lower interest rates on credit cards, mortgage loans, auto insurance and other personal finance items.
Let's take a look at different types of credit scores, how they’re determined, what they’re used for, and what you can do to boost your creditworthiness.
Understanding your credit score: Getting beyond 'Good'
Here are a few things to keep in mind when diving deep into credit scores:
- A credit score is a numerical representation of your credit history—your record of paying back borrowed debt.
- Credit bureaus update their credit scoring models, which can affect both your credit score and the number of scores available.
- You have dozens of credit scores. Credit bureaus generate them, and lenders use them to make lending decisions.
What is a credit score?
Credit scores are mathematical formulas that calculate the likelihood that you will pay back the money you borrow, based on your past borrowing behavior listed in your credit reports. If your credit reports indicate that you make a lot of late payments or fail to pay back debt completely, your credit score will suffer.
Credit scores are formulas that look at the information compiled in your credit reports, and they come up with a number—a credit score—which tells lenders if they should lend you money and how much interest they should charge you if they do.
Companies like FICO and VantageScore create credit scores. Most of the different credit scoring models follow the same general principals. Let’s take a closer look, starting with FICO.
What is a FICO score?
FICO—developed by Fair Isaac and Company—is the most widely used credit scoring model. As we said, most FICO scores use a range of 300 to 850. While a score of 670 to 739 is considered “Good,” lenders will likely give you better lending rates if your credit score is “Very Good” (740 to 799) or “Exceptional” (800 to 850). Most lenders use FICO scores when deciding whether to offer you a loan or credit card, according to the Consumer Financial Protection Bureau.
Lenders first started using FICO scores in 1989. FICO has updated its base scoring formula over the years to keep pace with changes in the lending market. But when FICO releases a new version to the market, not all lenders upgrade at the same time. That means different lenders may see different scores for you. Currently, FICO Score 8 is the most widely used version of the company’s base credit score.
FICO also has industry-specific scores—for auto loans, for instance. FICO says the foundation of these versions is the same as their base versions, but each is fine-tuned for industry-specific risk behavior. Here’s the difference:
- A base FICO score is designed to predict how likely you are to pay back a loan on time.
- An industry-specific score predicts how likely you are to pay back a specific type of credit—such as a car loan—on time.
On top of that, each of the three major credit reporting agencies has a different version of each FICO score it uses. That means there’s a FICO 8 Score for Experian and a different FICO 8 Score for both Equifax and TransUnion.
Worth noting: Not everybody has a FICO score.
“To have a FICO score at all, you need at least one account that’s been open six months or longer, and you need at least one creditor reporting your activity to the credit bureaus in the last six months,” says Leslie H. Tayne, founder of Tayne Law Group in New York.
Why credit score ranges are important
Typically, “Prime” credit is defined as a credit score that falls in the second-highest range of a scoring model—that would be a FICO score from 740 to 799. The top range is “Super Prime.” If you have a Prime or Super Prime credit score, a bank is more likely to approve you for a loan and offer the best interest rates.
“At the upper end of the FICO range, consumers will get the very best pricing available to them—typically over 740 FICO, although it ranges widely by bank and by credit product,” says Brendan Coughlin, head of consumer lending at Citizens Bank in Providence, Rhode Island.
Given the scale, a single point can have an impact. That’s why it’s important to try to drive up your credit score to 740 and higher. It could help save you money.
What is a VantageScore?
The VantageScore model was developed by the three major credit reporting agencies—Equifax, Experian, and TransUnion—and introduced in 2006 under the name VantageScore Solutions. If you’re wondering what a good VantageScore is, the answer depends, in part, on which model you’re using. There are three available VantageScores: VantageScore 1, 2, and 3. VantageScore 4 is expected to be released in fall 2017.
The ranges for the older VantageScore models 1 and 2 are 501 to 990. Also, the models use letter grades—A through F—for each level of risk. Here’s how they look: