What is a credit score and what does it do?

Your credit score affects many aspects of your life: whether you qualify for a loan or credit card, the interest rate you will pay, and sometimes whether you can purchase a home.

A higher credit score can obtain credit products with lower interest rates. For example, suppose the borrower has a credit score of at least 750; in such a case, they may be qualified for 0% financing or 0% introductory credit card deals. Understanding how credit scores work and what ranges they fall into is essential.

What are credit scores?
You can calculate your credit score, usually a three-digit number, from 300 to 850, by determining how likely you are to repay a loan and pay your bills.
Your credit accounts are taken into account when calculating your credit score. Then, compiled into your credit report by credit-reporting agencies, also known as credit bureaus. The three largest bureaus are Equifax, Experian, and TransUnion.

Credit score ranges
Creditors set their standards for acceptable credit scores, but here are some general guidelines:

• Excellent credit - 720 or higher.
• Good credit - 690 and 719 points.
• Fair credit - 630 and 689.
• Poor credit - 629 or less.

Your income, debt, and credit score can influence whether a lender approves your application.

FICO versus VantageScore: How do they compare?
The two major credit rating companies are FICO and VantageScore. VantageScore's main competitor is the FICO score, which is the most widely known, and they typically range between 300 and 850. FICO and AdvantageScore use the same information, but they weigh it differently. In addition, VantageScore and FICO are often linked: If you have a high VantageScore, you probably have a high FICO.

How does my VantageScore compare to my FICO score?

Since a score is a snapshot, it can change every time you look at it. It is possible to have different credit scores depending on which credit bureau generated your credit report. The different scores are because credit bureaus don't receive all information about all accounts from every creditor, so every credit report is different.

Each company uses a different scoring formula. However, the most popular scoring models are FICO 8 and VantageScore 3.0.
There are also slight differences between FICO and VantageScore.

What is the average credit score?

• There is some variation in the average credit score in the United States between the two major scoring models. For example, a FICO 8 score of 716 was the average during the second quarter of 2021, while the VantageScore 3.0 averaged 695 during the same period.

What influences your credit score?

• The two most common credit scoring models, FICO and VantageScore, consider a lot of the same factors but weigh them differently. What matters most in both models is:
• Punctuality when paying bills. Missing your due date by 30 days or more can negatively affect your credit history.
• What is your debt? Timely payment is almost as significant as your credit utilization or how much of your credit limit is utilized. Your credit usage should not exceed 30 percent - the lower, the better. Lowering your credit utilization is quite simple and rapidly affects your credit score. 

Despite their lower importance, these factors are still worth paying attention to:

• Credit age: The older your credit accounts are, and the longer you have credit, your credit score is higher.
• Credit mix: Having multiple types of credit improves your credit scores, such as a traditional loan and a credit card.
• How recently you applied: Applying for credit may temporarily lower your credit score.

Credit improvement tips
Your score depends on a variety of factors. However, the following tips can help you improve your score:

• Ensure that all bills are paid on time.
• The balance on your credit card should be less than 30% of its limit, ideally much less.
• Use a mixture of installment loans and credit cards to increase the average age of your accounts and keep your oldest credit cards open. Apply for credit in bite-sized amounts instead of all at once.

You can increase your credit score and boost it once established by doing various things once you begin building credit. Remember that it takes time to repair your credit score once damaged, so be careful with applying for loans, and credit cards, watch your credit utilization, and don't miss payments!