What Is A Credit Score? How To Understand And Check Your Score

Your credit score is an important number in the world of finance. Since it’s used as a universal measure of your financial responsibility, keeping your score high is the typical goal everyone wants to achieve. But what is a credit score, how does it change, how can you check your score and why does it affect your financial future?

These basic questions are important to answer when it comes to your credit score so you can make the best decision when it comes to your money.

What Is A Credit Score?

Your credit score is a number that lenders and banks can use to determine how much of a risk it would be to lend you money, and how likely you are to pay it back on time. This number can increase or decrease depending on your payment history, spending habits, length of credit, and other factors. All of these transactions get recorded on your credit report which affects your credit score.

Your credit score is calculated by three major credit bureaus: Equifax®, Experian™ and TransUnion®. They use the information from your credit report to assign your credit score. The more positive your credit track record (on time payments, an established credit history, etc.), the higher your credit score is likely to be.

What’s The Difference Between A FICO^® Score And A VantageScore^®?

The two companies have many similarities, both with a mission to help lenders determine the risk of lending to consumers and using the same credit score range of 300 – 850.

The main differences between a FICO^® and VantageScore^® comes from the fact that they’re different companies, which accounts for the slight differences you might see in how their scores are determined. For example, FICO^® won’t create a credit score until your credit account has been active for 6 months, while a VantageScore^® can be obtained even if the account is less than 6 months old. The Rocket Money^SM app uses and reports your VantageScore®.

What Is A Credit Score Used For?

Banks and lenders will use your credit score to determine your ability to pay back the money you borrow from them. This is why a high credit score is important to maintain if you’re planning:

• To take out a mortgage
• To qualify for an auto loan
• To get a new credit card or other line of credit
• To determine premiums on auto insurance, homeowners insurance and other types of insurance policies

What Are The Credit Score Ranges?

Your FICO^® credit score can range between 300 – 850 and within this there are sub-ranges that lenders us to categorize your credit score:

• Poor: 300 – 579
• Fair: 580 – 669
• Good: 670 – 739
• Very Good: 740 – 799
• Excellent: 800 – 850

Where you fall within the range will depend on multiple factors, so it’s good to know where you’re starting so that you can achieve a good credit score. VantageScore^® breaks down credit scores into an additional category for very poor scores, so this model does not directly line up with the FICO^® scoring model above.

What Factors Affect Your Credit Score?

Now that we know your credit score can increase or decrease based on your credit report, let’s get into what factors affect that score and report. Each one of these factors contribute to how your FICO® score is determined, so keep these in mind when trying to boost your credit. Your VantageScore® will weight these factors slightly differently.

• Payment history (35%): Your payment history shows whether you make your payments on time, how often you miss payments, and any late payments. This is the largest factor that can affect your credit score, so make sure to make payments on time every month.
• Amounts owed (30%): This is how much money you owe, from your credit card to your loans. The more money you owe and the longer you take to pay it off, the more your credit score may take a hit. A way to offset this is to try to make at least the minimum payments to your loans and credit cards.
• Length of credit history (15%): The longer you’ve been active on your credit report, the better your score is going to be. This is a passive factor and will take time to build, so it might be a good idea to get a credit card sooner rather than later to increase the length of credit history.
• Credit mix (10%): Your credit mix refers to the different credit accounts that you have, for example, mortgages, loans or credit cards.  With more accounts comes more responsibility to keep up with them, so make sure to manage your different accounts responsibly to increase your credit score.
• New credit applications (10%): If you take on a new credit account or loan, you might see an initial dip in your credit score. This is normal and happens because you haven’t built up a reliable history with this account yet. Continue to keep up with the payments on the new account to show you’re not a financial risk to see your score bounce back.

Why Is It Important To Have A Good Credit Score?

A high credit score shows banks and lenders that you’re less of a financial risk, which opens up your options financially. This makes tasks like getting a mortgage easier as it increases your ability to qualify for better interest rates or to get approved for a higher credit limit.

How To Boost Your Credit Score

If you’re stressing about your credit score, or looking to boost that number, there are a few ways you can improve your credit score.

1. Pay Your Bills On Time

Making payments on time is going to be very important to increase your credit score. Each month you’ll have to pay at least the minimum payment suggested if you want to keep your score up. If you want to go a step further and boost your score, try paying down your entire balance each month or making larger payments more often.

2. Maintain A Low Credit Utilization Ratio

Your credit utilization ratio is the amount of credit you have available to use and how much you’re actually using. To calculate your credit utilization ratio, take your total balance on your cards divided by your total credit limit. Then multiply by 100 to get your percentage. For example, if you have a credit line of $10,000 and you have borrowed $2,500, you have a credit utilization ratio of 25%. The lower the percentage the better -- a good ratio is considered lower than 30%.

3. Hold Different Types Of Credit Accounts

Having different types of credit accounts shows your ability to manage your money, even when you have multiple accounts to look after and of different kinds. Different kinds of accounts include student loans, auto loans, mortgage, credit cards and more.

How Do You Check Your Credit Score?

Checking your credit score is free, easy and worth knowing so you can keep track of your financial state. You can find your score in a few different ways, like free credit scoring sites or the annual credit report website, where you can get a free copy yearly. It’s becoming popular for banks and financial institutes to provide free credit score checks, these can be found by logging into your account.

Another popular score is through financial apps that have a credit score feature, like the Rocket Money app. After signing up, you can check your credit score regularly without hurting your credit score.

Credit Score FAQs

Some frequently asked questions about credit scores.

What is considered a good credit score?

A good FICO^® Score would be between 670 – 739, which is achieved by making payments every month and keeping a low credit utilization ratio.

How often does my credit score update?

Your credit score updates monthly with each credit card statement. You can check monthly as well with free websites or apps like the Rocket Money app.

What credit score do I need to buy a house?

This can range depending on multiple factors, but you would typically want to have a credit score of 600 or higher to better your chances of qualifying for better interest rates.

The Bottom Line

Your credit score is used by lenders to assess how much of a financial risk you are. It’s important to maintain a good score by making payments on time, keeping a low credit utilization ratio and managing your accounts monthly so that you can set yourself up to qualify for better rates.

Download the Rocket Money app if you’re looking to access your credit score, credit utilization ratio and other credit history information.