The Good, Fair, and Poor: How Your Credit Score Is Determined

Your credit score is an important part of your financial health. When you know how your credit score is determined, you can use that knowledge to improve your score. It doesn’t take long to learn, and it can pay off for you in many ways.

For starters, a high credit score usually means you get a lower interest rate on loans. Good credit could also help you get better credit cards, including cards that earn cash back on your purchases. In most of the U.S., your credit standing even affects your insurance rates. It could also influence your ability to rent an apartment.

So who decides if your credit score is good, and how do they make that determination? Here’s everything you need to know.

Freedom Debt Relief isn't a Credit Repair Organization and doesn't provide, or offer, services or advice to repair, modify, or improve your credit.

Who Determines Your Credit Score?

The three major credit bureaus—TransUnion, Equifax, and Experian—determine your credit scores. Each of these companies collects information about you and uses it to make a credit report. Based on this credit report, each bureau also calculates a credit score using a formula called a credit scoring model. 

The most widely used scoring model is the FICO® Score, created by the Fair Isaac Corporation (FICO). Because the FICO Score model is so popular, you may hear some people refer to your credit score as simply your FICO score. But there are several types of FICO scores, and there are other brands of credit score, too. Another model is VantageScore, created by the credit bureaus.

Credit scoring models use the information in your credit report. Your credit scores from the three bureaus might not be identical, even if they all use the same scoring model. That’s because not all creditors and lenders report to all three agencies. There’s a cost involved with reporting, so some creditors only report to one or two of the agencies. 

Since the credit bureaus may not all have the same information on you, this could mean a different credit score at each one. 

To check that credit bureaus don’t have any mistakes, get a copy of your credit report from each bureau at least once per year. You can pull your credit report for free at AnnualCreditReport.com and review it for errors.

You May Like These

How to Pay Off Debt

What Is a Balance Transfer?

How to Get Out of Debt Fast

What Factors Go Into Determining Your Credit Score?

Since the FICO scoring model is the most widely used, we’ll look at it more closely. These are the five factors it considers:

• Payment history is your track record of on-time and late payments as reported by your creditors. Missed payments hurt your credit score once they’re at least 30 days past-due. The higher the ratio of on-time payments to late payments, the more creditworthy you’ll look to a lender. Always paying on time can help you build a strong payment history. 

• Amounts owed is your debt. The biggest factor within this category is your credit utilization ratio. That’s how much credit card debt you have compared to your credit limits. If you’re using nearly all the available credit on your credit cards, your utilization is likely to damage your credit score.

• Length of credit history is the amount of time you’ve had your credit accounts open. The longer you’ve spent making payments on time, the more positively this will impact your score. A short history of credit usage doesn’t tell lenders how you handle credit accounts over longer spans of time.  

• Credit mix is the combination of your various credit account types. A variety of loan types, such as home loans, credit cards, car loans, and mortgages, will generally lead to a higher score. It shows that you have experience with managing multiple credit accounts at once and gives the lender more confidence. 

• New credit looks at the number of new accounts you’ve opened recently. If you’ve opened several accounts in a short window of time, it could be a signal to lenders that you’re having financial difficulties. Each time you apply for credit, you could lose a few points off your score. You'll typically recover those points gradually over the next year.

The VantageScore system uses similar but not identical factors, which makes it hard to do an apples-to-apples comparison. For example, FICO and VantageScore both give the most weight to payment history but with different importance. Because the scoring models have their own calculation methods, your FICO score and your VantageScore won’t be identical.

Which Credit Score Factors Are Most Important?

Some of these factors carry more weight than others. This chart shows the percentage of your score that each factor makes up.

What Is a Good Credit Score?

Every lender decides what it will consider an excellent, good, fair, or poor score, so these ranges are a guideline, not a rule. 

FICO considers a good credit score between 670 and 739.  According to VantageScore, good credit ranges from 661 to 780. Both types of credit score have a range of 300 to 850, and an 850 is the highest possible credit score.

Here’s a  breakdown of all the FICO Score ranges and what it means to have a score in each range when you apply for a loan or credit card.

What Doesn’t Go Into Your Credit Score?

Information outside your credit report has no impact on your credit score. Your score is based entirely on your credit history.

Your credit score is unaffected by your:

• Income

• Age

• Employment history

• Marital status

Rent, utility bills, and everyday expenses don’t impact your credit, either. Most landlords and utilities companies don’t report your on-time payments to the credit bureaus. 

If you don’t have a lot of experience with credit, you could request a credit score that factors in your on-time rent or utility payments. This is an alternative score, and you don’t get it automatically. FICO, VantageScore, and all three credit bureaus offer alternative scores. In some cases, the creditor has to request it. Search for Experian Boost or Ultra FICO. If you know you want your rent payments reported, search for Rental Kharma or Rent Reporters.

How Does Debt Impact Your Credit Score?

If you’re struggling with debt, your credit score may be struggling too, since the second largest factor is your credit utilization ratio.If you’re close to maxing out your credit cards, you’ll have high credit utilization that hurts your credit score.

But your payment history is the largest factor, so you could still have a good credit score even if you’re deep in debt—as long as you consistently make payments on time.

Believe it or not, this is actually a risky situation. Your credit score and your ability to get approved for loans aren’t all that matter. You also need to be able to pay bills, plan for retirement, save for emergencies, and work toward other money goals. You could achieve those things with or without good credit, but it will be extremely difficult if you’re saddled with lots of debt.

If you just focus on paying monthly minimums to protect your credit score, you’re not doing much to actually pay down your debt and improve your financial situation. As the debt continues to grow, so do the minimum payments. And if you fall behind on those, your credit score could start falling while your debt grows.

Sometimes, to take care of your overall financial health, you need to put your credit score on the back burner temporarily and prioritize debt. That’s where Freedom Debt Relief comes in.

For less than the amount you’re paying in monthly minimums now, our debt settlement program could help reduce the amount you owe your creditors and get rid of your debt. To find out more, give one of our Debt Consultants a call at 800-910-0065.