To interpret your credit score, and what it tells you about your borrowing power, you need to understand where the score falls along the score range between the lowest and highest numbers generated by its scoring system.
All credit scores have the same basic goal: helping lenders and other potential creditors, such as landlords and utility companies understand how risky it may be to do business with you. High credit scores indicate relatively low likelihood of default and relatively low risk for creditors. Lower scores, in turn, indicate greater risk. An extremely low credit score, which suggests a history of poor debt management, may cause creditors to decide against lending you money, leasing you an apartment, or issuing you phone or cable equipment.
More often, lenders use credit scores, along with other information such as employment history and proof of income, to decide how much they are willing to lend you and at what interest rate. Landlords and utility companies also may use credit scores to help decide whether to charge you a security deposit—and how large it should be.
All other factors being equal, a higher credit score generally means you'll pay lower interest rates, fees and deposits. Over the lifetime of a loan, even a small reduction in rate can save you thousands of dollars in interest, so it pays to have a high credit score. Credit scores are calculated using computer programs known as scoring models. Scoring models perform sophisticated statistical analysis on the contents of your credit report—your history of borrowing and repaying debts, as recorded by the three national credit bureaus: Experian, Equifax and TransUnion.
Scoring models look for patterns in your credit report data that historically have been associated with payment defaults among consumers.
Based on the prevalence or absence of these patterns, scoring models assign you a score, usually in the form of a three-digit number, reflecting your predicted riskiness relative to other consumers. There are also often multiple versions of a given model available from its developer something like different versions of Windows or Android and specialty models designed for specific industries.
When comparing one credit score to another, or tracking changes in scores over time, it's important to know the following, to be sure you're making apples-to-apples comparisons:. Whenever you receive a credit score, either from a creditor explaining a lending decision or when you check your own score for informational purposes, the law requires inclusion of this information.
Trying to interpret a credit score without knowing its score range is a little like dressing to go outside when you're told the temperature is 30, but not whether that's in degrees Fahrenheit or Celsius. Knowing which scale to apply makes a huge difference. In that light, consider a credit score of It is fine-tuned to predict the risk of defaulting specifically on credit card payments. These scoring models dominate the mortgage market because their use is required for all mortgages sold to Fannie Mae and Freddie Mac, the country's largest purchasers of residential home mortgage loans.
Lenders want borrowers who will repay their debts, on time and as agreed upon in a loan agreement. If a lender feels they can rely on you to do that, they say you have "good credit," or that you're a low-risk borrower. If, based on a history of poor debt management, a lender doubts you will pay back a loan, they consider you to have "bad credit," and to be a high-risk borrower.
Most consumers fall somewhere in the middle of that spectrum, and credit scores help lenders understand individual borrowers' level of credit risk. Every lender has its own criteria for managing borrower risk. Some lenders avoid all but the lowest-risk borrowers, while others seek higher-risk borrowers with the understanding that they can charge them higher interest rates and fees as a trade-off. Generally, credit scores that fluctuate by a few points up or down won't have a big effect on your ability to get approved for a loan or credit card.
This is especially the case if you're well above a lender's score requirement for the best credit terms think scores above If, however, a point change drops your score below a lender's minimum requirement, your application could get rejected.
The good news is credit scores are not forever. They are snapshots of a moment in your credit history, and you can improve your credit score by making good credit decisions and by taking advantage of tools to help raise your score to the next level. Paying down credit card balances is another way you can increase your scores quickly.
Credit scores are a reflection of your credit history—of decisions good and bad you may have made about handling debt. Good credit decisions today can lead to a more positive credit history in the future. That, in turn, can bring higher credit scores and better borrowing opportunities. Fair Isaac Corp. VantageScore scoring models evaluate credit using similar factors. VantageScore characterizes their relative importance as follows:. If your score increases to , it might not matter — the lender was already offering you the best deal.
In these cases, a rise or drop of a few points could make a big difference. There are common traits among different credit scores. Now that you know the factors that make up your credit scores, you can focus on building or maintaining your scores so that your credit will be in good shape when you need to apply for a financial product in the future.
Ultimately, lenders may set their own credit ranges and criteria for approving an application. But if you know where you stand on a credit score range, you can make educated guesses about your financial profile. If you use this knowledge while shopping for financial products, you may be able to avoid submitting unsuccessful applications. Read this post in Spanish. Image: Young woman sitting on a bus and thinking about credit score ranges.
In a Nutshell Knowing where you fall on different credit score ranges can help you make smarter financial decisions tailored to your credit profile. Advertiser Disclosure We think it's important for you to understand how we make money. In addition to being a contributing writer at Credit Karma, you can find his work on Business Insider, Cheapi… Read more. Many or all of the products featured here are from our partners who compensate us.
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Credit scores influence many aspects of your life: whether you get a loan or credit card, what interest rate you pay, sometimes whether you get an apartment you want.
A higher credit score can give you access to more credit products — and at lower interest rates. It pays to know how credit scores work and what the credit score ranges are. A credit score is a three-digit number, usually on a scale of to , that estimates how likely you are to repay borrowed money and pay bills.
Credit scores are calculated from information about your credit accounts. That data is gathered by credit-reporting agencies, also called credit bureaus , and compiled into your credit reports. The three largest bureaus are Equifax, Experian and TransUnion. Creditors set their own standards for what scores they'll accept, but these are general guidelines:. A score of or higher is generally considered excellent credit. A score between and is considered good credit. Scores between and are fair credit.
And scores of or below are poor credit. In addition to your credit score, factors like your income and other debts may play a role in creditors' decisions about whether to approve your application.
Two companies dominate credit scoring. The FICO score is the most widely known score. Its main competitor is the VantageScore.
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