The Fundamentals of Credit
Your credit score is a distillation of your credit report, which assesses the larger tapestry of your financial journey. Though many factors go into your credit report, your credit score is the three-digit summary that predicts how likely you are to pay your debts on time.
As mentioned above, your credit score is calculated by two companies: FICO and VantageScore, who use detailed, evolving formulas to determine scores.
FICO (short for Fair Isaac Corporation), has been around for over 30 years and claims to be used by over 90% of lenders.
Conversely, VantageScore joined the credit conversation in 2006, and was founded by the three major credit bureaus: Equifax, TransUnion, and Experian.
While you can request your credit report for free at AnnualCreditReport.com, there are a number of websites that can also provide your credit score, including:
• Nerdwallet.com (VantageScore)
• Creditscorecard.com (FICO)
• Wallethub.com (VantageScore)
• FreeCreditScore.com (FICO)
Many banks and financial institutions also provide free credit scores to their customers.
What’s a Good Credit Score?
You’ve checked your score. Now, you want to know how it stacks up.
The average FICO score in America is 711, while the average VantageScore is 688. Though these numbers are constantly shifting, the averages have improved nationwide over the last decade.
In 2009, for example, the average FICO score was considerably lower at 686.
Still, all of these numbers are considered “Good” according to both FICO and VantageScore.
But what does that actually mean from a borrowing standpoint?
The benefits of higher credit are clear: consumers with scores in the mid to upper-600s are typically recognized as “prime” borrowers and may qualify for higher credit limits, higher loan amounts, and lower down payments.
According to recent studies, borrowers with a FICO score of 723 are only delinquent 5% of the time. In other words, they almost never miss payments.
My Score is Less-Than-Good: What Now?
If your score isn’t where you want it to be, don’t worry. There are plenty of ways to boost your record, so you can access all of the credit products you need.
If you want to take a deep dive into repairing your credit, click here for our complete hands-on guide.
But if you’d rather read the Sparknotes version, here are some great ways to get started:
Get a copy of your credit report: This is an entirely free and hugely important step in the process. Why? Because you need to review your credit report and ensure everything in it is accurate. Any incorrect information and/or fraud can have a negative effect on your credit score.
Go to AnnualCreditReport.com to get started.
Pay your bills on time: Though this is certainly easier said than done, the importance of paying bills on time can’t be overstated. In fact, it’s the most important category of all, as it accounts for 35% of your FICO credit score!
Keep your old accounts open: Though it may sound counterintuitive, it can actually be a good thing to have multiple credit accounts open at once. Having a longer credit history can be very positive for your total score.
(Note: while it’s important to keep your old accounts open, don’t rush out to open multiple new accounts at once! Doing so could lower both your average account age and your individual credit score.)
Don’t get overextended: As a general rule, finance experts advise consumers to only borrow 30% of their total available credit limit. Once you go past that point, your credit score will likely begin to drop.
While there are many ways to build credit, the most important factor at play is time.
In addition to patience, success also requires disciplined, repeatable habits to consistently pay bills on time and establish a proven track record.