This is a comprehensive guide of a good Credit Score Reports for people living in the United States of America. We will help you to completely understand how your credit score works to avoid costly mistakes in the future. As citizen or immigrant, you have several scores for your day-to-day financial life. But for the sake of this article, we will focus on the ones lenders care the most about in banking.
Now comes the big question; do you know your credit score? Some will say ‘Yes’ while others will say ‘No’. However, according to research done by Javelin, statistics shows that nearly half of population of people living in the U.S never check their score.
When you hear about credit scores, it mostly sounds confusing and filled with misinformation. As an individual, what you may assume to be good for your credit can actually lower your score – and vice versa. Therefore, some people might even feel better to ignore your score completely without knowing the consequences.
In a nutshell, if you take time to carefully understand how credit scores work, it will be beneficial because it will help you to earn a strong score. In addition, a strong score can save you serious money over time. Trust me, I’m telling you the truth.
What is a Credit Score?
The simple definition of a credit score is a limit of number that rates a consumer’s creditworthiness to a financial institution. With that in mind, whether you want to loan/borrow money, open a utility account or rent an apartment, you need a score. This is because you’re asking a businessman, entity or even a financial institution to trust in your ability to pay back your loan or general bills on time. This fact is very simple, short & self explanatory. Commercial Banks, big and small loan lenders and leasing landlords of properties can’t contact every one of your business associates to enquire of your credit worthiness. They can also contact all your credit card issuers and ask of your history with money or bank statement. Instead of that, they will just go to an approved centre and pull your credit score quickly.
Now, if your entire financial life could be streamlined to one number in a booklet, it would be your credit score. It’s a 3-digit figure (100-999) that represents your history of borrowing and paying back money. Going by this, the higher the score, the more trustworthy you will look to all creditors.
Consequences of Overlooking Your Credit Score
Although you might look at this as nothing; that your borrowing history could be reduced to a single number in summary, banks as well as other creditors take it very importantly. Know this; a poor credit score could mean paying back outrageous interest rates on credit cards and loans. (Thats if you’re even approved in the first place). Simply because of a poor score, you might be asked to pay a deposit upfront to open a cell phone account. Frustrating right? What about that dream apartment you applied for? You might loose it too because of bad credit. Truly, the landlord might ignore your application and hand the keys to a tenant with better credit score instead.
While, on the other hand, having a good/high credit score means borrowing money at the lowest rates available. Go and verify. You don’t have to worry about losing out or paying more because you appear financially irresponsible. This is a soft landing right? Give yourself the answer.
What is the Difference Between Credit Score and Credit Report?
Don’t get it twisted, Credit Score vs. Credit Report are not the same thing. While on the other side, you might assume that a credit score and credit report are interchangeable. Even though they are similar and/or closely related, they are different. A credit report and a credit score are two separate items, and understanding the difference is vital for more assimilation.
A credit report is a statement that has information about your credit activity and current credit situation such as loan paying history. WHILE a credit score is a number from 300 to 850 that rates a consumer’s creditworthiness. The higher the score, the better a borrower looks to potential lenders.
Difference Between Credit Score and Credit Report
The 3 major credit bureaus – Experian, Equifax and TransUnion – usually collect your personal and financial information from all your transactions and compile it all into one credit report. Credit reports detail personally identifying information such as your biodata. They include your name, address and Social Security Number (SSN). It also consist of all your open and closed credit card accounts, loans, bills in collections, liens and bankruptcies.
Where can I Check My Credit Score?
You’re entitled to a free credit report from each of the three major bureaus through this website; AnnualCreditReport.com. It is the only federally authorized website to provide free credit reports in the US. In the past years, people could only access each individual report once a year. But, in the wake of the COVID-19 pandemic the federal bureaus are allowing free weekly reports until the end of 2022. You can take this advantage to monitor your credit score by viewing the reports online.
In the long run, by making use of these 3-digit numbers in your credit reports, companies will be able calculate a credit score. After that, they share these information with all type of banks, lenders and other organizations. And because there are multiple credit bureaus, there may be more than one credit report and credit in your name.
Similarities and Difference Between Fair Isaac Corporation (FICO) & VantageScore
The FICO and VantageScore are not the same thing. While it might seem hard to believe, you have several credit score. Oh yes! You have not one, not a few, but dozens of scores. Nonetheless, they’re not all created or used equally in a financial transaction.
FICO is an analytics company that is helping businesses make better decisions that drive higher levels of growth, profitability and customer satisfaction.
VantageScore is a leading credit-score model development company that generates the most inclusive, innovative and predictive models used in the consumer-credit score.
Fair Isaac Corporation (FICO) and VantageScore
Over the years, FICO data analytics company is the biggest and most universal source of credit scores. Basically, FICO produces customer scores based on the information found in your credit reports. As can be seen above, we told you that each bureau collects and reports your information on their own, your FICO score will usually differ among them. Right?
John Ganotis, founder of the website Credit Card Insider said this; “Even under the FICO brand, there are several different models used for different purposes, like for considering a mortgage application versus a credit card application,” John’s website recently merged with personal finance site MoneyTips.com. To cut the explanation short, there are just 16 versions of the FICO score used today.
Even though FICO is the most widely known credit scoring model, it certainly isn’t the only one available online. “In some years past, the three credit bureaus started a joint venture and created VantageScore, a competing model for FICO scores,” says Lyn Alden, founder of Lyn Alden Investment Strategy. The Lyn website provides market research to individual investors and financial professionals. She notes that VantageScore is now considered another “real” credit score used by lenders – but with less market share than FICO. Check online for more details.
What Are the Factors That Influence Your Credit Score?
Normally, there are several factors usually put into considerations when calculating a credit score of a person. Furthermore, even though the specific formula is vital in calculation, we know the FICO model is based on these five (5) main credit score factors below:
Credit score factors
1. Payment history (35%)
Paying your bills on time is very important if you want to avoid late payment fees/interest. Secondly, it’s also the No. 1 factor in your FICO score. In fact, payment history accounts for more than two- third of your credit score number. Even as little as 1 or 2 missed payments can seriously impact your score. Therefore make your payments on time to avoid this.
2. Amounts owed (30%):
The total amount of debt you personally owe in comparison to your total available credit is another important factor in this. This alone accounts for a little under a 3rd of your FICO score. In reality, this is in most cases known as your credit utilization ratio. That is; the lower your ratio, the better.
3. Duration of credit history (15%):
Every lender, landlord, etc want to know if you’ve been in the credit game for sometime. Note that your credit score will continue to improve beneficially as your credit history lengthens. Thats the fact.
4. Credit mix (10%):
Now, the different types of accounts you operate also helps boost your credit score. This goes a long way to showcase that you’re able to handle a variety of debts, such as credit cards, student loans or a mortgage. While using multiple accounts, you still need to be in good credit standing or else they’ll negatively impact your FICO score. Its the truth.
5. New credit (10%):
You will agree that too many hard inquiries and new accounts within a short period of time is not good. It will throw up a red flag that you might be struggling to keep up with your bills. An advise I personally give people is; if you’re rejected for a credit card, calm down. Don’t be in a hurry to try your luck elsewhere. Simply wait some few months and improve your credit first. Anyways, if you’re rate-shopping for a home/mortgage, auto or student loan, do so within about 45 days. Why? So that all the inquiries are treated as one. Fortunately, this factor only makes up 10% of your FICO score. Therefore, so opening a new account every now and then will have a negligible impact. Trust me in this.
What about VantageScore?
“While exact percentages have not been revealed, VantageScore has revealed that it weighs its credit score similarly to FICO, with payment history and credit utilization being the most important factors,” Alden says. These are followed by age of credit, credit diversity and new credit as less important factors. “Usually, FICO scores and VantageScores for the same individual are close in number,” she notes.
What Are Credit Score Ranges?
From my own point of view, when it comes to what constitutes good or bad credit, each credit facilitator has its own definition of score range. More so, your credit scores break into different ranges that indicate where you can generally falls on the spectrum of creditworthiness. This means that the numbers are different depending on the creditor.
Meanwhile, FICO’s credit score ranges are as follows:
- Exceptional: 800 and above
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 579 and lower
Presently, (2022), the national average FICO credit score was 714. It can however change as years goes by.
While on the other hand, VantageScore 3.0 also ranges from 300 to 850. The scores are categorized a bit differently from FICO method:
- Excellent: 750 to 850
- Good: 700 to 749
- Fair: 650 to 699
- Poor: 550 to 649
- Very poor: 300 to 549
In the meantime, the average VantageScore is 697 as of May 2022. Updates will come in once it changes.
What is A Good Credit Score?
Credit Score: Definition, Factors, and Improving It – Best credit score is 670 to 739. See details in the quote below;
A Good Credit Score ranges vary depending on the credit scoring model, generally credit scores from 580 to 669 are considered fair. Secondly, 670 to 739 are considered good. Thirdly; 740 to 799 are considered very good; and lastly, 800 and up are considered excellent.
What is a good credit score?
We always advise people not to stress themselves about maintaining the perfect credit score for every algorithm out there. But if you have a solid FICO score the better. meaning that you’re probably in good shape since this is the scoring model used by 90% of lenders when evaluating loan applicants. And you don’t need an 850 to get the best interest rates. Generally, a FICO score above 760 gets you access to the same rates and terms as someone with perfect credit.
How to Check and Monitor Your Credit
Going by facts, we know that a person’s credit score can fluctuate over time. That is the reason why it’s a good idea to always keep an eye on it. Previously in the past, for you to gain access to your credit-score, you will have to subscribe to an expensive and often unnecessary credit monitoring services. However, many companies have made strides in bringing a level of information visibility to consumers that only financial institutions used to enjoy. Times has really changed. FICO and Vantage score are there for us today. Lets explain them below;
1. Free FICO Scores
This score company is free but not always used by creditors. And since your FICO score is the one most often used by lenders, it’s the score you should be most interested in monitoring. Generally, there are a handful of sources you can rely on to provide your FICO score each month at no cost, such as credit card issuers and banks. Yes, thats true. Now take for example; Bank of America offers free FICO scores in partnership with TransUnion. Wells Fargo offers free FICO scores in partnership with Experian. There lots of instances to look at, but lets continue to the next one.
2. Free VantageScore Scores
Believe when I tell you this; if your bank doesn’t offer free FICO scores, it likely offers free VantageScore scores. In addition, VantageScore isn’t relied upon by lenders nearly as often as FICO is trusted. However, it does follow a similar scoring model and will give you an estimate of your credit score. For example, Chase, U.S. Bank and Capital One all provide VantageScore 3.0 scores through one of the three credit bureaus.
These days, there are different websites and mobile apps that also provide free credit scores. One of the most popular one is Credit Karma. This site currently provides both credit reports and VantageScore 3.0 credit scores from TransUnion and Equifax.
How to Improve Your Credit Score Successfully
Many people will want to improve their credit score but don’t know how. Also, with so many types and sources of checking your info, working toward good credit might be exhausting. However, if you calm down & take a step back you will get it right. You will first of all focus on the basics, then you can grow your credit score without too much stress.
“Even though there are many different credit scoring models that generate a variety of scores, these different models generally consider similar factors,” says Ganotis. “My advice for people who want to maximize their scores is to focus on the fundamentals of good credit instead of obsessing over slight fluctuations in points on a specific credit score you’re monitoring.” If you do this, he says, you should see your score go up over time.
Factors that Impact FICO to Help Build Your Credit Score
After reading from the explanations above, you will want to know how to re-build your credit score. Lets get on with it. So, based on the 5 factors that impact your FICO score, these tips can help you build good credit over time:
Tips can help you build good credit
Make sure you Pay your bills on time.
When it comes to your credit score, paying all your bills on time is the single best thing you can do.
Try to Keep your credit utilization low.
Actively using credit cards is a great way to keep your credit score healthy. Aim to keep your credit utilization in the single digits, which means using less than 10% of your available credit. And always pay the total off each month if you can – you don’t have to carry a balance and incur interest charges to build good credit.
Don’t waste time, just Start using credit early.
Since your credit history is a moderately important factor in your credit score, you can start building credit at 18. Even if you open a credit card and charge $20 each month, you will make strides in building a strong history. And note: FICO treats open and closed accounts the same, so don’t be afraid to close a credit card account that’s costing you money. Remember, however, that closing an account will increase your credit utilization rate because you’ll have a smaller overall pool of credit to draw on.
Diversifying your credit.
When it makes sense financially, explore other credit options such as financing a car or consolidating credit card debt with a personal loan. Paying off a mix of credit types will help boost your score.
Do not open new accounts.
As tempting as it is to chase every sign-up bonus and 0% APR offer, allow some breathing room in between account openings so you don’t look desperate for funds.
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It is knowledgable that Credit scores might be complex, but a careful money management can help you perfectly. So, by paying your bills/loans on time, spending wisely and only borrowing what you need, you should see your credit-score report turn out to be the best. It is all in your hands to grow your credit score. Wishing you the best, stay safe.