Everybody has a credit score, but a lot of people don’t really know what it is. A survey by the American Bankers Association found that 44 percent of Americans didn’t know the difference between a credit report and a credit score.
As it turns out they are two distinctly different things. A credit report is a list of the details of your payment history on all of your accounts, inquiries made about your credit report, any overdue debts and other aspects of your credit history. A credit score is a different way of representing some of that same information.
What Is a Credit Score?
A credit score is a three-digit number usually between 300 and 850 that tells lenders how likely you are to pay back your loans according to the terms of your agreement. The higher the score, the better and the more likely lenders believe you are to make your payments on time.
The number is based on data that the three major credit reporting agencies, Experian, TransUnion and Equifax, use in your credit reports. Lenders use credit scores to quickly determine whether to approve you for a loan and what kind of rates to offer you.
A FICO score is by far the most common type of credit score and is used by 90 percent of lenders. FICO has also created scores for specific industries that range from 250 to 900. An auto lender, for example, would most likely use the Auto Score. These scores could vary slightly from your standard score but would likely be in a similar range.
What Makes up a Credit Score?
FICO creates three different credit scores based on the credit reports from the three credit reporting bureaus. Your scores from all of them will likely be similar, but you might see some slight differences because each bureau reports slightly different things.
Although there can be some variation, FICO uses five main factors in determining your credit score. Your payment history makes up 35%; 30% comes from the amount of debt you have; the amount of time you’ve had your accounts represents 15%; the amount of new credit you have accounts for 10%; and the last 10% is derived from your credit mix – the different types of credit that are being reported.
If you don’t have much information in one section, other areas might become more important factors in determining your score.
What Is a Good Credit Score?
Lenders generally group credit scores into five categories – poor, fair, good, very good and exceptional. An exceptional score is 800 or higher. Very good scores range from 740 to 799. If you have a very good or exceptional score, you’ll be approved for most loans and get a decent interest rate.
The average score for Americans is 695, which in with the “good” range of 670 to 739. Scores between 580 and 669 are below average and in the “fair” category. Many lenders will still approve loans for people in this category, but the rates may not be as good. Scores that are lower than 580 are categorized as poor and signal to lenders that you are a risky borrower.
How to Your Check Credit Score
In the past, it was almost impossible to get your credit score without paying a fee. Although some companies still charge, it’s now easier than ever to get your score for free.
You can get your score directly from FICO for a fee. When you pay for your score, you may get extra features with it, such as the ability to model different scenarios to see how they would affect your score.
Today, many credit card companies provide their customers with their scores for free and even including them on their credit reports or monthly statements. You can also visit a number of websites that offer free score-checking services. While some are actually free, beware of sites that give you a free trial and then charge you for a membership if you don’t cancel quickly enough. You could also speak with a non-profit credit counselor or a housing counselor approved by the U.S. Department of Housing and Urban Development (HUD).
How to Manage Your Credit
If after you check your credit scores you want to improve it or make sure it doesn’t get worse, you can take steps to help you manage your credit.
Making all of your payment on time is a sure-fire way to improve a bad score or maintain a good one. If you’re behind on payments, try to catch up and then be sure not to miss anymore. Setting payment reminders on your phone or writing them on your calendar can help keep you on track.
Paying off debt can be a challenge but doing so will raise your score. If you’re in debt, avoid using credit cards and focus on paying off what you owe. Making a budget can help with this. Budgeting is also a great idea even if you don’t have debt. It’ll help you ensure that you can pay off anything you charge.
If you’re having trouble keeping up with payments, contact your creditors or a certified credit counselor. No matter what steps you take, be aware that it can take time to change your score. A collection account, for example, stays on your report for seven years.
Knowing and understanding your credit scores can help you obtain loans for important investments like higher education. We offer a variety of financial aid services to help you find the best options for you.