If you've ever wanted to make a big purchase like a car or home or applied for a loan, you've likely heard the term credit score but do you know what it is and the role it plays in your financial life?
What is a Credit Score?
Most frequently referred to as your credit score you may also hear it referred to as your credit history or credit report. Your credit score is a three-numbered rating that lenders give to you based on how much of a risk you are for lending money. The higher the number the better your score.
Credit scores range from 300-850 with 714 as the average score in the United States in 2022.
Your credit history or credit report gives a more detailed look at what credit you have and how you've handled your credit. Credit reports list your bill payment history, loans, current debt, and other financial information. They show where you work and live and whether you've been sued, arrested, or filed for bankruptcy.
FICO vs. VantageScore...What's the Difference?
FICO is a brand of score that stands for the Fair Isaac Corporation founded by an engineer named Bill Fair and a mathematician named Earl Issac. FICO was a pioneer in developing a method for calculating credit scores based on information collected by credit reporting agencies. It's typically used today for home mortgages. VantageScore is another brand of score that has become popular in recent years, created in the last decade by the three top credit reporting agencies: Experian, Equifax, and TransUnion.
Factors That Impact Your Credit Score
No one likes lending money and not getting it back. The same goes for lenders! They just want to make sure that you'll pay back the money they loan to you. Knowing what factors impact your credit score is key so you can start building good credit and making smart decisions that will increase your score while knowing what to avoid.
The following five points from Nerdwallet outline what impacts your FICO score:
- Payment history (35% of your score): Late payments can really hurt your credit score so pay on time! If your account is in collection or if you've declared bankruptcy that will also bring down your credit score.
- Amount of debt relative to credit limits (30%): This is how much of your available credit you are using — the less, the better for your score.
- Age of credit (15%): This refers to how long you've had credit and the average age of your credit accounts.
- Recent applications for credit (10%): Something called a "hard inquiry" when you apply for new credit can raise your score for up to six months. That's why it's important to research and think before you decide to open any type of credit like a store credit card. When you're checking out at your favorite store the clerk may say you'll save a certain amount if you open a store card. Think hard before you do this.
- Whether you have more than one type of credit (10%): Having both installment loans (those with regular payments on a lump sum like a car loan or a mortgage) and revolving credit (like a credit card where you repay what you borrow) can help your score.
How to Get Your Credit Score and Credit Report?
According to the Federal Trade Commission, you have the right to get a free copy of your credit report every year from the three nationwide credit bureaus: TransUnion, Equifax, and Experian. Some financial advisors suggest staggering your requests over a 12-month period to help keep an eye on your reports and make sure they have accurate information. The best way to get your free credit report is to
- go to AnnualCreditReport.com or
- call Annual Credit Report at 1-877-322-8228
Through December 2023, everyone in the U.S. can get a free credit report each week from all three nationwide credit bureaus (Equifax, Experian, and TransUnion) at AnnualCreditReport.com.
And everyone in the U.S. can get six free credit reports per year through 2026 by visiting the Equifax website or by calling 1-866-349-5191. That's in addition to the one free Equifax report (plus your Experian and TransUnion reports) you can get at AnnualCreditReport.com.