- A credit score measures how well you handle debt, such as credit cards, auto loans, and mortgages.
- There are various credit scores, but the most common ones are FICO scores and Vantage scores.
- An excellent credit score can save you lots of money.
We all have some idea of what a credit score is. It's a three-digit number, between 300 and 850, that tells lenders how creditworthy you are.
But many don't know much more than that. So read on if you want to discover:
- What goes into your credit score
- How much a great score can save you in hard cash compared to a bad one
- Why credit score ranges can be important
- How you can monitor and actively manage your score – free
- What is a good credit score
We'll cover all those in this article. And you'll also find links to other articles that can help you boost your score – and keep it high.
What Goes into Your Credit Score?
There are many myths about the sorts of information used when calculating a credit score. Some think a criminal record plays a part. Or having lots of assets. Or how you run your checking account.
But none of those is true. At least, not directly. If your going to jail means you can't pay your bills, the defaults will count. Or if you misuse your account to the point your bank sues you, that court judgment might affect your score.
But the only things that change your credit score are pieces of information on your credit report. That's an electronic file, maintained by a credit bureau, that stores information about your finances.
True, it also records identifying details about you. But that's just to make sure it applies the right data to the right file.
So what does your report show?
- Current and past employers
- Names of people with whom you've jointly applied for credit
- All open accounts, including your payment history going back up to seven years
- All closed accounts going back 10 years, with their payment histories going back seven years
- "Collections, property foreclosures and repossessions of vehicles or other merchandise as a result of non-payment"
- "Hard" credit inquiries – When a lender accesses your credit report in order to make a lending decision
- Bankruptcies (on file for up to 10 years) and other court judgments concerning your finances
And that's it. Nothing else affects your score. Not your race, or wealth or neighborhood. Yes, plenty of rich people have poor credit if they've managed their money badly.
That list throws up something scary. It says your payment history stays on your report for seven years. But don't panic too much if you've been through tough times and are now back on track.
Your credit score automatically weighs recent activity as much more important than older stuff. And lenders who look at your report will usually see things the same way.
So don't see past problems as a bar to improving your credit score. Almost everyone can boost theirs a bit within months. And, over time, everyone can transform theirs -- once their finances have stabilized.
Credit report errors
Decades ago, people used to talk about GIGO when discussing computing. It stood for Garbage In, Garbage Out. In other words, if incorrect information were fed into an IT system, incorrect information would come out.
People may not use the term anymore. But the principle still holds good. And it's particularly problematic when it comes to credit reports.
A 2021 study by Consumer Reports found more than one in three consumers in a survey found at least one error in their credit report. And some of those significantly damaged their credit scores, making their borrowing more expensive.
You're legally entitled to one free copy of your reports each year. And you can get yours through AnnualCreditReport.com. Be sure you're on that official site because some scammers go to great lengths to persuade you their fake site is the real thing. Once you have your copies, go through them carefully to identify errors.
Read Credit Repair: Remove Errors & Improve Your Report for more information.
How Much a Great Score Can Save You in Hard Cash
In 2022, Syracuse University published a report that said:
"The average person can save thousands throughout their lifetime by maintaining a good credit score. It can knock down the interest rate on a car by 10 percent and cut the amount a person pays in interest for a college degree in half. Maintaining a good credit score can also keep you from joining the 1 in 10 unemployed people who are denied a job due to poor credit."
The report went on to identify some examples of average dollar savings that someone with excellent credit can make compared to someone similar with bad credit:
- Undergraduate degree – Save $48,425.24 on a student loan
- Car loan – Save $9,320
- Credit card – Save $4,975.23
- Apartment rental security deposit – Save $1,006
- Annual car insurance – Save $1,374.10
- Annual homeowners insurance – Save $590.50
Syracuse University didn't include mortgages in its examples. But FICO has a loan savings calculator for those. And, on the day we visited (rates change all the time), someone with excellent credit would pay $253,979 in interest for a 30-year, fixed-rate mortgage. For the same loan, someone with poor (not terrible) credit would pay $361,046. That's more than $100,000 just there.
Having a low credit score could cost you tens – perhaps hundreds – of thousands of dollars over your life. It makes pretty much all your borrowing more expensive through higher interest rates and loan fees. And it can affect other outgoings, such as insurance premiums and landlord deposits.
Why Credit Score Ranges Can Be Important
Many lenders use credit score ranges or bands when making lending decisions.
In other words, they group together everyone within a particular credit score range and offer them the same interest rate and overall deal.
FICO itself uses the following ranges to define consumers' credit:
- Under 580 – Poor
- 580-669 – Fair
- 670-739 – Good
- 740-799 Very good
- 800+ – Excellent
But lenders are free to set any ranges they like. And some have more bands with tighter ranges.
Even though you won't know for sure which bands your chosen lender uses, this can work in your favor. Suppose your score is currently 579. If you can add just one point to your score, you'll move from being a poor credit risk to a fair one.
And it works all the way up the scale. If you have a score of 795, you need only five extra points to become an excellent risk.
Remember that in the months leading up to your making an application for an important loan. Monitoring and actively managing your score during that period could move you from one range to a better one. And your loan might cost you less.
Which brings us to our next topic …
How Good Are Free Credit Score Services?
Perhaps the most important thing you can do to stay on top of your credit score is to get your free annual credit reports each year. You can pay for additional ones if you plan to apply for a big loan, such as a mortgage or auto loan.
But, nowadays, many companies offer paid-for or free credit score monitoring services. These promise to keep you updated with how your score's moving – and often why. And that can only be a good thing. However, you need to recognize the limitations of all these services.
To start with, you probably have dozens of these scores. Your lender may use VantageScore or FICO scoring technologies. And it may have old versions of those that throw up slightly different scores from the latest ones.
Or it may base its scores on credit reports from one, two or three of the big credit bureaus, each of which may contain different information. Meanwhile, some lenders use scoring technologies that have been tweaked to work better for their particular sectors.
So your free credit score provider shows you one score while your lender might see any of a pile of others. But that's often not as big a problem as it sounds.
Because changes in the score you're monitoring are likely to be reflected in the scores lenders see. For example, if you make a late payment, you're likely to see a similar hit across all your credit scores. Or, if you pay down a chunk of credit card debt, that too should be reflected across all those scores.
So your free credit score can show you how your score's doing and suggest how to improve it, even if it can't always give you the same number that a lender sees.
What Is a Good Credit Score?
You already know what a good credit score is. Because you just read some definitions under Why Credit Score Ranges Can Be Important.
According to FICO, a good credit score is one within its 670-739 range. Any higher, and your score is very good or excellent. Any lower, and it's fair or poor.
But FICO isn't the only game in town, although it's by far the biggest. And many lenders now use its competitor, VantageScore, in place of or as well as FICO. And VantageScore reckons a good credit score on its scale is 661-780.
Here are its credit score ranges:
- Very poor: 300 to 499
- Poor: 500 to 600
- Fair: 601 to 660
- Good: 661 to 780
- Excellent: 781 to 850
Of course, you can call your score what you like. And if you've moved from a poor credit range to a fair one, nobody will blame you for thinking your score is good.
Are you now keen to enhance your score? Then read Improve Your Credit Score.
Lenders often categorize groups of lenders within score ranges. Suppose yours uses VantageScore’s ranges and counts everyone with a 500-600 score as having poor credit. Those people are likely to be offered the same high interest rate on their loan.
According to FICO, a good credit score is one within its 670-739 range. But Vanatage score defines it differently: within its 661-780 range.
So there’s no single definition. It’s when lenders are reasonably comfortable lending to you.
Probably. They aren’t perfect. But a good one should keep you up to date with where your score is moving. And that’s valuable.
However, choose your score monitoring service with care. Some are better than others, and it’s worth spending some time picking a reputable one. You may find some paid-for services better than free ones. So comparison shop across the market to find your ideal one.