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The Ultimate Guide to Understanding Credit Scores


In some form or fashion, numbers are used to rank, rate, or influence pretty much any decision of consequence. It should come as little surprise that a few unique figures — three, to be exact — play a huge role in determining whether you can buy a home, lease a car, or borrow money for just about any purpose.

That's the power of credit scores, and the more you know about yours, the better off you'll be from a financial point of view. Here's your primer.

What is a Credit Score? 

A credit score is a three-digit number between 300-850 that indicates how likely you are to pay off loans and other debt on time. Like a numerical grade in school, your credit score is calculated using an algorithm that incorporates select data — in this case, from your credit report, including number of open accounts, total levels of debt, and repayment history. The higher your score, the more attractive you are to potential lenders.

When Did Credit Scores Start?

Credit scores can be traced to 1989, when Fair, Isaac and Company (now Fair Isaac Corp.), a California-based data analytics firm, introduced the first FICO scores using information collected from the three national credit bureaus (aka, credit reporting agencies or CRAs): Experian, Equifax, and TransUnion.

FICO scores quickly gained acceptance, and by 1991, were being used extensively by financial institutions to make objective lending decisions. Prior to the introduction of FICO, lenders relied on a more old school approach: personal knowledge of the buyer's character.

In 2006, Experian, Equifax, and TransUnion formed a joint venture to launch VantageScore as an alternative to FICO. VantageScore, which is managed by an independent company, utilizes machine learning to estimate the likelihood of someone repaying debt or defaulting.

Today, FICO and VantageScore are both referenced by lenders, but FICO remains the most widely used credit scoring model.

Difference Between a Credit Score and Credit Report 

Although the terms are often used interchangeably, your credit score and credit report are two different things.

Your credit report is a comprehensive record of your borrowing and repayment history for loans and credit card debt. Each of the three CRAs create credit reports using detailed information, divided into four categories:

  • Personal information
  • Open and closed credit accounts
  • Credit inquiries
  • Public records

Reports vary slightly among the credit bureaus, but they all include:

  • Total outstanding debt
  • History of securing and paying off loans and credit
  • Monthly payments, including whether payments were made on time, late, or missed altogether

Credit reports also contain such historical financial data as bankruptcies, charge-offs for bad debt, and foreclosures or vehicle repossessions. These negative entries can stay on your credit report for up to ten years, and lenders typically consider them grounds for declining a loan application.

Your credit score is derived from key information found on your credit report.

Your credit score, on the other hand, offers a numerical snapshot of your creditworthiness. Derived from your credit report, this three-digit number allows potential lenders to quickly and easily determine whether you're a credit risk. The higher your number, the more inclined they are to loan you money or extend credit because you're statistically more likely to make payments on time.  

What Makes Up Your Credit Score?

Your credit score is derived from key information found on your credit report. So, if an item doesn't appear on your credit report, it can't affect your score.

Although FICO and VantageScore use variations of specific factors and proprietary equations for each of their analytical models, the following five categories of data are generally used to calculate your credit score:

Payment History

The more consistent you are, over time, paying back debt such as loans or credit card bills, the higher your credit score. Late or missed payments, collections, charge-offs, and foreclosures all negatively impact your credit score and remain on your report for seven years.

Credit Utilization

Credit utilization is the amount of debt you're using compared to how much you have available. When you use more credit, your credit utilization ratio increases, which subsequently lowers your credit score since lenders consider you to be at a higher risk of defaulting.

Length of Credit History

Generally, a longer credit history is better because it provides more information about your spending and debt repayment habits. A track record of consistently paying your bills on time and keeping accounts open for an extended period will help to raise your credit score.

Credit Mix

Managing a variety of secured and unsecured loans simultaneously shows lenders you're a good manager of debt. This, combined with a proven track record of on-time payments, can have a dramatic impact on your credit score. 

New Credit

Opening numerous credit accounts in a short period of time triggers multiple hard inquiries on your credit report, which will reduce your credit score. A lot of new credit also makes it appear like you're taking on large amounts of debt because you're in financial trouble.

Types of Credit Scores to Know

Whether you realize it or not, you have multiple credit scores. That's because there are numerous scoring models — FICO and VantageScore being the most prevalent — as well as different scoring methods among each of the three main credit bureaus. What's more, many lenders have developed their own scoring systems.

FICO Score

FICO is recognized as the pioneer of scoring models, and FICO Scores are currently used to make more than 90% of lending decisions in the U.S. Although FICO has developed multiple versions of its scoring models over the past three decades, they're all quite similar to the original.


There are several VantageScore models, and each uses a different formula to determine creditworthiness. According to the credit agencies, this allows them to calculate scores with greater "consistency, predictability, and accuracy."

FICO vs. VantageScore

When you cut through the clutter, your FICO Score and VantageScore are the numbers that matter most. Both indexes use a scoring range from 300 to 850 to rate creditworthiness, and both utilize past behavior to predict future outcomes. However, FICO and VantageScore differ in the way they weigh and rank several factors. And while FICO generates a separate score for each bureau, VantageScore incorporates data from each of the three major CRAs to create a single tri-bureau credit score.

Type of Credit Score Data Source Factors Affecting Your Credit Score
FICO Score Experian


  • Payment history (35%)
  • Current level of debt (30%)
  • Length of credit history (15%)
  • Types of credit used (10%)
  • New credit accounts (10%)
VantageScore 4.0 Experian


  • Total credit usage, balance, and available credit (Extremely Influential)
  • Credit mix and experience (Highly Influential)
  • Payment history (Moderately Influential)
  • New accounts opened (Less Influential)
  • Age of credit history (Less Influential)
VantageScore 4.0 Experian


  • Payment history (40%)
  • Age and type of credit (21%)
  • Credit Utilization (20%)
  • Balances (11%)
  • Recent credit (5%)
  • Available credit (3%)

Despite their inherent differences, your FICO Score and VantageScore are largely determined by your payment history and use of credit as outlined in your credit report. Therefore, the scores themselves shouldn't be wildly different. Large discrepancies between your FICO Score and VantageScore (50 points or higher, for instance) might indicate errors in your credit report, which you should seek to correct.

Custom Credit Scores

Many large lenders use custom scoring models developed by in-house statisticians or external third parties. Typically, custom credit scores are unique to the specific business and rely on credit reports, account histories, and other financial information that the lender has on file. 

What's a Good Credit Score?

Your credit score varies based on the model used (FICO or VantageScore) and the credit bureau (Experian, Equifax, or TransUnion) that supplies the data. Generally, a score of 670 and above on the common 300 to 850 scale is considered good, with 800 or higher viewed as excellent or exceptional.

That said, FICO and VantageScore use slightly different terminology and score ranges to classify an individual's credit rating. They include:


People with a score in this range carry low balances on their credit cards and have a long history of paying their bills on time. Typically, they'll receive lower interest rates on mortgages, credit cards, loans, and lines of credit because they're considered low risks for defaulting.

Very Good/Good

Individuals who have a credit score in this range are generally financially responsible when it comes to money and credit management. They make most of their payments — including loans, credit cards, utilities, and rental payments — on time.


The national average FICO Score — 711 — falls into this category. Individuals in this range may earn competitive interest rates, yet it might be more difficult to qualify for some types of credit.


Borrowers in this category have some negative issues in their credit history, but no major delinquencies. Typically, they can qualify for credit, but at less attractive rates.

Poor/Very Poor 

Individuals with a poor or very poor credit score have significant damage to their credit history caused by multiple defaults or a bankruptcy. They'll need to repair their credit score before obtaining new credit.

Score Classification (FICO/VS) FICO Score Range VantageScore Range
Excellent/Exceptional 800-850 781-850
Very Good/Good 740-799 661-780
Good/Fair 670-739 601-660
Fair/Poor 580-669 500-600
Poor/Very Poor 300-579 300-499

Average Credit Scores

The average FICO score in the United States is currently 711, which positions it squarely in the "good" category. Meanwhile, the average VantageScore stands at 688.

As a group, individuals age 75 and older have the highest credit scores, with averages of 758 and 729 for FICO and VantageScore, respectively. On the other hand, consumers between the ages of 18 and 23 have the lowest average scores on both the FICO and VantageScore indexes.

Age groups with the biggest disparity between their average credit scores are Gen-Xers (ages 40 to 55) and baby boomers (ages 56 to 74). Both the FICO Score and VantageScore averages are 40 points or higher for boomers compared to Generation X.  

Age Average FICO Score Average VantageScore
18-23 674 654
24-39 680 658
40-55 688 676
56-74 736 716
75+ 758 729

Credit Score Needed for a Loan

Since every financial institution sets its own guidelines for lending, a specific credit score doesn't guarantee you'll qualify for a certain loan product or interest rate. However, a higher credit score increases the likelihood that you'll be approved and receive the best rates and terms.

Of course, a lot depends on what type of loan you're applying for and how much money you need to borrow. As a rule, larger loans are harder to obtain and require a better credit history. So, if you're applying for a conventional mortgage, lenders will look for a higher credit score than if you were seeking a personal loan or opening a credit card.

Type of Loan Minimum Credit Score*
Personal loan 550-580
Auto loan 652
Student loan 670
Conventional mortgage 620
FHA loan 580
USDA loan 640
VA loan 620
Personal line of credit 690
Unsecured credit card 550

*Estimates from numerous sources

How to Check Your Credit Score for Free

By law, you can receive a free copy of your credit report each year from all three national credit bureaus. In fact, it's something you should do so you can verify or correct the information that's been reported.

Keep in mind, however, that your credit score doesn't appear on your credit report. You can see all the data used to determine your FICO Score and VantageScore, but the actual scores are calculated by separate companies using proprietary algorithms.

Even though you aren't entitled to receive your credit scores for free, there are ways to obtain them. Many credit unions, banks, and credit card companies now provide their members and clients with complimentary access to their credit scores. Advisory services such as Credit Karma and Credit Sesame also offer a free copy of one or more of your credit scores (usually your VantageScore), though some require you to sign up for a membership.

Does Checking Your Credit Score Lower It?

Contrary to what many people think, checking your credit report doesn't lower your credit score. This is called a soft inquiry, which has no effect — good or bad — on your credit.

However, when you apply for new credit, the lender will pull your credit report and check your credit score to determine your potential credit risk. This is known as a hard inquiry. These types of credit checks — which require your permission before a company can perform them — typically decrease your credit score by five points or less for a short period of time.

The higher your credit score, the more attractive you are to potential lenders.

Credit Score FAQs

Unfortunately, myths and misconceptions abound when it comes to credit and credit scores. Here are some answers to frequently asked questions related to credit scores:

How Often Are Credit Scores Updated?

Credit scores fluctuate as your credit report is updated with new balance amounts, bill payments, account openings, and other information. Depending on how often the data is refreshed, your credit score could move up or down multiple times each month.

What Credit Score Do You Start Out With?

Technically, there's no such thing as a starting credit score. If you've never used credit, you simply don't have a score. That changes once you open your first line of credit and begin establishing a payment history. Lenders will start sending information to the credit bureaus, which will create a file that contains the data used to determine your initial score.

Do Other Countries Use Credit Scores?

Many countries around the world don't use any type of credit scoring system, while others — Canada and the United Kingdom in particular — employ models similar to FICO and VantageScore.

Japan, Germany, Australia, the Netherlands, and other nations calculate credit in decidedly different ways, but the general idea is the same pretty much everywhere: people who maintain good credit get better deals than those who have bad credit.

How Do You Improve Your Credit Score?

The best way to establish and maintain a high credit score is to make consistent, on-time payments on any loans, credit cards, and bills (rent, utilities, cell phone) you may have. If you need or want to improve your credit score, there are a few additional things you can do:

  • Pay your bills on time, every time
  • Correct any errors on your credit report
  • Settle your largest outstanding balances as quickly as you can
  • Reduce credit utilization to 30% or less
  • Limit requests for new credit
  • Keep old accounts open and resolve delinquencies

Boosting your credit score is a good goal that's certainly worth the effort. Just keep in mind that it takes time to see significant jumps or repair any damage you've done.

The Bottom Line

For better or worse, your credit score impacts most aspects of your financial life. But it doesn't have to define you.

By paying your bills on time, reducing secure and unsecured debt, and using credit wisely, you can move beyond the numbers.

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