Exploring Credit Scores


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Written by: Guest | Best Company Editorial Team

Last Updated: March 13th, 2020

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Guest Post by Sean Messier

In the world of personal finance, you’re bound to hear mention of your “credit score” at every turn — and for good reason. Your credit plays a major role in your ability to borrow money, which is often necessary in life, whether you’re securing a mortgage for your very first house or shopping loans for a new car.

But what’s all too often overlooked is that the term “credit score” is misleading. It implies that there’s one all-powerful number that governs your creditworthiness, and that’s simply not the case. There are numerous credit scores created by different brands, and each is determined through a unique formula. Understanding how your credit scores work is an essential step on the path toward peak financial health.

What are credit scores?

In the simplest of terms, a credit score is an indicator of your creditworthiness. These numbers are generally formulated through a variety of factors concerning your financial behavior as reported by the nation’s primary credit-reporting bureaus, Equifax, Experian, and TransUnion.

Most popular credit scoring formulas are similar to some degree, but it’s important to know that the factors that determine a score do tend to change from one formula to the next.

What’s more, popular credit scoring formulas are updated regularly to keep up with the ever-changing world of finance. VantageScore, for example, recently released its version 4.0 — the first-ever personal credit scoring system to take historical debt patterns into consideration.

What types of credit scores are there?

By now, it’s likely clear that there are a variety of credit scores. But why do so many of these scoring formulas exist?

For one, several different scoring system brands — primarily FICO and VantageScore — were developed by competing entities seeking to deliver the best scoring solution available for a variety of situations, as is typical in any industry where there’s more than one major player.

Even these individual scoring systems have numerous variations, though, and that’s primarily because different types of scores can be used for different applications.

If you’re applying for a credit card, for example, the issuer might see a credit score that differs from the score that an auto lender would see after you submit a loan application. This stands to reason because credit cards and auto loans operate differently, so certain factors in each formula are weighted in a way that makes sense for whoever’s determining your creditworthiness.

Not sure where your credit scores currently stand? There are several ways to check your credit scores online.

How are credit scores formulated?

Delving into the details of each and every credit score on the market would be nearly impossible, but understanding the fundamentals of the scores you’re likely to see most commonly should make it easier to develop positive credit-building habits.


FICO is the old guard of credit scoring. Created by Fair Isaac Corporation, the FICO credit-scoring system dates back to the late 1980s, and it remains the nation’s most widely used credit-scoring brand to this day.

Currently, most personal FICO scores range from 300 to 850, and they’re determined by five different factors:

  • Payment history (35%): True to its name, payment history is based on your history of paying your bills on time.
  • Amounts owed (30%): Your amounts owed covers your total debt balances, as well as your overall credit utilization ratio, which refers to your balances versus your overall credit limit.
  • Length of credit history (15%): The age of your credit account matters. The longer an account’s been opened, the better for your FICO scores.
  • New credit (10%): Applications for new credit often result in hard inquiries, which can cause a slight temporary dip in your credit scores. Likewise, frequent requests for additional credit can make you look like a greater risk to lenders.
  • Types of credit (10%): It’s in your best interest to hold several types of credit accounts. This can include revolving credit accounts, like credit cards, and installment loans, like mortgages.

What’s a good credit score, and how does it affect me?

There’s plenty of buzz around the idea of great credit scores, but if you’re still new to the world of credit, it may not be clear how much great credit can help you out. This leads to an important question: what exactly do great credit scores look like?

Judging your credit scores

There’s no hard-and-fast definition of what a “good credit score” looks like, because the way your credit scores are viewed will depend on the lender in question, as well as what sort of credit your applying for and the type of score being used. In general, this chart should serve as a solid rule of thumb:

Above 760: Excellent
700–759: Good
660–699: Fair/Average
Below 660: Poor/Bad

Having credit scores above 760 doesn’t guarantee anything, but you can generally assume that you’re more likely to receive loan and credit card approvals, as well as the best credit card offers, interest rates, and terms than if your scores were considerably lower.

Having poor credit scores might mean you’ll get denied for certain loans and credit cards. And even when you’re approved, you’ll generally have to deal with high interest rates.

How do I build my credit scores?

Poor credit scores bring with them a host of obstacles, but that doesn’t mean there’s no hope to remedy your situation. To the contrary, building good credit from scratch is fairly straightforward, and the same goes for improving poor or average credit scores. This ultimately depends on your ability to take the scoring factors discussed earlier into consideration.

Bear these tips in mind, and you’ll be well on your way to credit scores that can help you land the best credit card scores and interest rates available:

  • Always pay your bills on time. This includes credit card bills, loan payments, utility bills and more. Late credit card payments can lead to hefty late fees, and late payments can be reported as delinquent if they remain unpaid for long enough. Delinquencies will wreak havoc on your credit scores for many years.
  • Keep your utilization ratio low. A $5,000 credit limit might seem helpful, but that doesn’t mean you should carry a $4,500 balance. The higher the utilization ratio, the more damage done to your scores.
  • Keep accounts open, even if you don’t use them much. Older credit accounts boost your credit scores due to their age and extra available credit. That said, you’re likely better off closing unused accounts with annual fees if you're not getting enough value from them.
  • Only apply for new credit when you need it. One hard inquiry here and there won’t have a major negative impact on your credit scores, but applying for loans and credit cards with abandon is never a good sign for lenders.
  • Try to maintain at least one line of credit. Unless you’re committed to a debt-free life, try carrying at least a credit card or two to show lenders you’re able to manage various debts. You can avoid credit card interest completely with most cards as long as you pay your statement balance in full each month.

A credit industry analyst at Credit Card Insider, Sean Messier strives to empower individuals with the knowledge required to use credit cards to their advantage. His writing and research-based background has granted him experience in an array of topics, from finance to business and beyond.

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