Credit Score Meaning
What Does My Credit Score Mean?
Your credit score is a three-digit number that sums up all the information on your credit report into one tidy number. It follows you around for your entire life, its value moving up and down depending on what’s happening in your financial life.
This three-digit score goes by two different names, FICO or VantageScore. The FICO score is named after the company who invented this three-digit scoring system in the mid-1980s, Fair Isaac, Inc. Many lenders use the FICO scoring system.
More recently, the three major credit reporting agencies created their own scoring system, called the VantageScore, designed to produce a more consistent score across all three credit reporting agencies. (Each credit reporting agency collects different financial information on you, and therefore, reports a different credit score.)
So what does a score mean? What’s a good credit score? Or a bad one?
With a VantageScore, you can determine what kind of rate and terms you’d qualify for. The VantageScore range is 501–990, along with an assigned letter grade.
A: 901–990 (Super Prime; lenders offer their best rates and terms)
B: 801–900 (Prime Plus; lenders offer good rates and terms)
C: 701–800 (Prime; lenders offer reasonable rates and terms)
D: 601–700 (Non-Prime; lenders offer less favorable rates and terms)
F: 501–600 (High Risk; lenders usually do not offer credit)
With a FICO Score, what kind of rates and terms you’d qualify for is not really defined. The FICO score range is 300–850. While there is no clear indication of what a good or bad score is, you can generally consider a score of 640–680 the dividing point between good and bad scores—the point at which above you’d get better rates and terms; the point at which below you’d get worse rates and terms.
The VantageScore Compared to the FICO Score
So what are the similarities and differences between the two scores? Because the VantageScore and FICO Score use different scoring systems, a VantageScore of say, 650 (considered “non-prime”) does not equal a FICO Score of 650 (where some lenders might consider that a “prime” score).
If you want to assess whether or not you’d qualify for a loan before you actually apply for it, you’ll want to assess your credit by the same credit score your lender will use. Just ask your lender if it uses VantageScore or FICO.
Both VantageScore and FICO appear to place high importance on:
- Payment history: whether or not bills are paid on time.
- New credit inquiries: how often you request new credit for, say, a credit card, a mortgage loan, or an auto loan.
Vantage Score appears to emphasize:
- Credit utilization: how much of your available credit you use.
FICO appears to emphasize:
- Length of credit history: the number of years you’ve been using credit.
- Types of credit you use: credit card, mortgage loan, auto loan, for example.
How Do I Improve My Credit Score?
The single most important thing you can do to improve your score is pay your bills on time, every month. Getting and keeping your paperwork organized can help you improve your credit score. By keeping your monthly bills in a “To Pay” folder with due dates highlighted and marked on your calendar, you become less likely to miss a payment, or even lose track of a bill because it’s hiding in a stack of unorganized papers.
Here is how FICO and VantageScore view your financial behavior and assign percentages to each behavior to determine your credit score. The higher the percentage, the more important that behavior becomes in determining your credit score.
As you can see, both FICO and VantageScore place a high importance on your payment history—whether or not you pay your bills on time, every month.
|Credit Behavior||VantageScore||FICO Score|
On time: improves your score
Late: damages your score
|The more available credit you have, the better (but the more you use, not so).||7%||not
|Do you use all of the credit you’re approved for (your available credit)? Even if you pay off your credit cards each month, try not to use more than 30% of the total amount of credit you’re approved for.
If you must carry a balance, limit it to that 30% of total approved credit.
|How much money you owe (your debt)
Low or zero credit card and loan balances: improves your score
High balances: damages your score
Depth of Credit:
|While the number of years you need to have used credit before they help improve your score rather than damage it is undefined, the longer you’ve used credit, the better.||13%||15%|
None to once a year: improves your score
Exceptions: requesting credit for insurance or mortgage or auto loans—lenders know you shop around for these types of products
|A combination of loan types: helps your score (having only one type of credit, such as credit cards, doesn’t hurt your score, but having a variety of types helps your score).||not applicable||10%|