Credit score

There are several companies that provide credit scoring models. The FICO credit score, which is created and implemented by the Fair Isaac Corporation, is by far the most widely used. Another popular model is the VantageScore credit scoring model, which is jointly owned by the three major credit bureaus—Experian, Equifax, and TransUnion.

There are other credit scoring models that certain lenders may use. However, these are the largest, and the vast majority of loan decisions use either the FICO score or the VantageScore model.

Each model can produce several different scores. For example, you have different FICO Scores for your credit reports from each major credit bureau. Plus, there are versions specifically intended for things like auto lending and credit cards.

While the popular credit scoring models all use the same general information from your credit report, there are a couple of important things to know. First, the actual formulas used to calculate your credit score are a well-guarded secret. And second, the FICO score is by far the most popular among lenders, so we’ll take a closer look at how it works.

The FICO credit scoring formula takes five different categories of information into account. While we don’t know the exact methodology, we do know the relative weights of each category:

1. Payment history (35% of your score)
   The most important component of your credit score is your payment history. In other words, paying your bills on time every month is the best way to build your credit score over time.
2. Amounts owed (30%)
   The second most important component of your credit score is the amounts you owe. And the most important factors are your credit account balances relative to your credit limits or original loan amounts.
3. Length of credit history (15%)
   In general, the longer your credit history, the better. The formula considers time-related data, such as the time since your oldest account was opened, the average age of your open credit accounts, and the ages of your individual accounts.
4. New credit (10%)
   There are two specific types of information in this category—inquiries and new accounts. The latter is self-explanatory. A credit inquiry happens when you apply for new credit, and a hard credit inquiry is completed.
5. Credit mix (10%)
   Creditors want to know that you can be responsible with different types of credit—not just one or two. For example, if you have a mortgage, auto loan, and credit card, it could be counted more favorably than if you just had one of the three.

There’s no set-in-stone definition of what a good credit score is, or what scores fall into the realm of bad credit, but here are some loose guidelines. FICO has a credit score range of 300 to 850, and the following is a general framework of the various credit tiers.

• Excellent credit: 800 or higher
• Very Good: 740-799
• Good: 670-739
• Fair: 580-669
• Poor: Below 580

If your credit score isn’t exactly where you want it to be, it’s a worthwhile goal to try and improve your credit score. The good news is that it changes as soon as new information is added to (or removed from) your credit report. With the knowledge of how your credit score works and a little strategy, you might be surprised at how much of an impact you can have.

As a final note, if you aren’t sure where you stand, there are several ways to check your credit score. You may be able to get a free credit score (FICO score or VantageScore) through one of your credit cards, as many offer this as a cardholder perk. Or, if you want to see all of the different versions of your FICO score, you can buy them directly from Fair Isaac at myFICO.com.