WTFinance: What is a Credit Score?

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Thinking about buying a house? That new car you’ve been dreaming about? Opening that coffee shop/bookstore/record store that also sells sandwiches? Big dreams require financial assistance, and in order to get good financial assistance, you need good credit. 

Unfortunately, there’s a lot of misinformation around about credit scores, Fortunately, we’re here to help you weed out the important info, like the differences between the two main credit scores, from the false, like the belief that unemployment hurts your credit. Read on to learn all you need to know about credit scores and how to make yours the best possible.

What is a credit score? 

If you’ve ever applied for a credit card, tried to rent an apartment, or looked into getting a loan, you’ve probably heard the term “credit score”. 

Are you wondering, “What is a credit score?” Your credit score is a number assigned to you based on your financial habits that represents your “creditworthiness”. It’s a universal grading scale that shows how “good” you are at managing your debts, ranging from 850 (an A+) to 300 (an F). 

Lenders or other entities that expect regular payments will look to your credit score to determine whether you’re likely to pay your payments and to do so on time. Your credit score will weigh extremely heavily in their decision to work with you. 

How is your credit score calculated? 

When it comes to credit scores, there are two main players that major credit bureaus and other lenders look to: your FICO Score and your VantageScore. Each calculates your credit score slightly differently. Let’s review. 

FICO Score

The FICO score, named after its developer Fair Isaac Corporation, is the longest running credit score. It was originally invented in 1956 and became the standard for consumer lending in 1989. In order to obtain a FICO Score, you must use credit for at least 6 months. 

FICO uses the following factors to calculate your credit score, listed in order of importance: 

  • Payment history (35% of your credit score): Do you pay your payments on time? 
  • Amounts owed (30% of your credit score): What is the ratio of your debt to your credit limit?
  • Length of credit history (15% of your credit score): How long have you been managing credit? 
  • New credit (10% of your credit score): How often do you apply for new credits? 
  • Credit mix (10% of your credit score): How many different types of credit do you have, and how do you handle each?

According to the FICO Score, credit scores are rated as follows: 

  • 800-850: Exceptional credit, resulting in great rates and terms
  • 740-799: Above average credit, resulting in competitive rates and terms 
  • 670-739: Good credit, resulting in average rates and terms 
  • 580-669: Fair credit, resulting in worse-than-average interest rates 
  • 300-579: Poor credit, unlikely to be approved 


VantageScore is the newcomer to the scene, originally debuting in 2006. It was introduced in order to better account for changes in technology and borrower behavior, with less emphasis on payment history and more on credit age and usage. Unlike FICO Score, VantageScore only requires 1 month of credit history. 

VantageScore uses the following factors to determine your score, listed in order of importance: 

  • Credit usage, balance, and available credit (most important) 
  • Credit mix and experience (very important) 
  • Payment history (somewhat important)
  • Age of credit history (less important) 
  • New accounts (least important)

According to the VantageScore, credit scores are rated as follows: 

  • 781-850: Excellent credit score, resulting in great rates and terms
  • 661-780: Good credit, resulting in average rates and terms 
  • 601-660: Fair credit, resulting in worse-than-average interest rates  
  • 500-600: Poor credit, unlikely to be approved 
  • 300-499: Very poor credit 

How to improve your credit score 

Are you feeling crushed by the weight of a poor credit score? The good news is that, with so many factors that contribute to both scores, there’s also much opportunity to improve it. 

The first step to protect your credit is to get a good understanding of where you’re currently at. Request a credit report and examine which factors are most heavily contributing to your current score. This will help you identify areas for improvement. 

Once you know which issues you need to tackle, it’s time to get to work. There are both short-term and long-term solutions to improving your credit score. Here’s how to solve the most common credit issues.  

Pay off as much debt as possible 

The first step to improving your credit score is to minimize your debt. Start by paying off your credit cards every single month. A balance on your credit card that’s carried from month to month is known as revolving debt. Lower this amount or get it to $0 to quickly increase your score. 

Additionally, make sure you pay all your current debts on time and, if you can, pay more than the minimum monthly payment. This is a sign to creditors that you’re responsible and proactive about paying off your debts. 

Pay your bills on time

This is especially important for your FICO Score. Be sure to pay your bills on the day they’re due every single time, if not a few days early. Even a payment that is only a few days late can have a negative impact on your credit score. 

If you can, use an automatic payment system offered by your bank or creditors. This will automate your on-time payments. Remember to check in each month and insure that your payment went through; it’s still your responsibility to make sure that your automatic payments work. 

If you didn’t start building a credit score at 18 and therefore have a history of late or missed payments, it’s not too late to get back in good standing. Get current with your payments and pay on time from here on out. Eventually, the on-time payments will outpay the late and they’ll become a thing of the past. 

Keep unused credit cards open 

Did you finally pay off that credit card that has been plaguing you with revolving debt for years? Before you say, “Sayonara!” for good, think about how closing that card may impact your score. 

First, closing a credit card will lower your available-credit-to-used-credit ratio, known as your credit usage. Additionally, history is good when it comes to credit. Creditors want to know you have been in the financial management game for a while and closing the account means it may not be visible on your report for them to see. 

Note that credit cards should never be opened solely for the purpose of increasing your available credit and improving your credit usage. This practice is an immediate red flag to creditors. Keep an eye on your total accounts

Minimize “hard inquiries”

When it comes to credit, lenders don’t want too many players in the game. As such, it’s important to keep your new credit applications to a minimum. 

You may be wondering, “How would they even know?” When a creditor makes an inquiry in your account, as they do when you apply for a new line of credit, they perform what’s known as a “hard inquiry”. A record of these inquiries remains in your credit history for 2 years, and too many can negatively impact your credit score. 

A soft inquiry, such as one that occurs when you pull your own credit score, will not. 

Don’t be afraid to seek help 

Many people who are in significant debt fear that looking for assistance from their creditors or credit counseling services will only worsen their debt. This assumption is wrong, without a doubt. 

Seeking assistance with your credit score will never count against you. If you follow the advice of these counseling services, you’ll begin to see slow but steady improvement. 

Why your credit score matters

Bankers and lenders view your credit score as a direct reflection of your reliability when it comes to repaying debt. A good credit score indicates to a lender that you’re likely to pay your debts back and do so on time, whereas a lower credit score indicates you might be a risk for your lender. 

Here are a few instances where your credit score will come into play, as well as potential effects of bad credit

  • When applying for a home or apartment rental, a poor credit score may cause a landlord to reject your application. 
  • When applying for a home loan, a poor credit score can result in extremely high interest rates or rejection altogether. 
  • When applying for a new line of credit, a poor credit score may lead to a very low credit limit or rejection. 

It’s important to remember, your score in no way defines you. It just gives lenders an indication if they are taking on a big risk in loaning you the money. Unfortunately, a lower score tends to give the lender the upper hand in the transaction.

We know this stuff can get tricky sometimes, so we took the streets of Indianapolis, IN to talk credit scores. Check out Mint’s own Ashwin Khurana kicking of our WTFinance video series in the Midwest and learn three easy ways to impact your credit score and … life the life you want!


Written by Mint

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