Credit Score

Equifax, Experian and TransUnion are the three main consumer credit bureaus. They collect and store information about you that they use to generate your credit reports, which are used as the basis of your credit scores.

A credit scoring model is a risk management tool that assesses the credit worthiness of a loan applicant by estimating her probability of default based on historical data. It uses numerical tools to rank order cases using data integrated into a single value that attempts to measure risk or credit worthiness.

FICO 8 scores range between 300 and 850. A FICO score of at least 700 is considered a good score. There are also industry-specific versions of credit scores that businesses use. For example, the FICO Bankcard Score 8 is the most widely used score when you apply for a new credit card or a credit-limit increase.

FICO® Score 8: The company says that FICO® Score 8, introduced in 2009, is currently the most widely used version of the FICO® Score.

Although VantageScore credit scores have been around for about 15 years, the FICO Score is still the preferred choice of most lenders. In the U.S., lenders use FICO Scores in 90% of lending decisions.

Payment history (35%): Your history of paying credit accounts is a big factor in determining your FICO® scores. Lenders understandably want to know whether you’ve paid your bills on time.

Amounts owed (30%): This refers to how much you owe on credit accounts, such as installment loans and credit cards, and the percentage of your available credit that you’re using (known as your credit utilization rate).

Length of credit history (15%): FICO® scores take into account how long you’ve had your oldest and your newest accounts. Also considered are the average age of all your accounts and how long it’s been since you’ve used certain accounts. Generally speaking, the longer the better.

Credit mix (10%): FICO® scores consider your mix of different credit accounts, though it’s not a key factor. These may include credit card accounts, mortgage loans and auto loans.

New credit (10%): New credit inquiries and recently opened accounts can influence your FICO® scores. For more information, check out our article on hard and soft credit inquiries.

Payment history: 100% is Excellent. 99% is Good. 98% is Fair. <97% is Poor.

Credit card usage: 0-9% is Excellent. 10-29% is Good. 30-49% is Fair. >50% is Poor.

Credit age: 9+ years is Excellent. 7-8 years is Good. 5-6 years is Fair. 0-4 years is Poor.

Total accounts: 21+ is Excellent. 11-20 is Fair. 0-10 is Poor.

Hard inquires: 0 is Excellent. 1-2 is Good. 3-4 is Fair. 5+ is Poor.

Having good credit is important because it affects your purchasing power and cost of insurance. Generally, if you have good credit, you will be offered lower interest rates on loans, credit cards, and lower insurance premiums.

Your credit determines your interest rate.

This is possibly the most important reason why you should have solid credit before buying a car. You don't want to pay hundreds or even thousands of dollars more than you have to. Instead, try to raise your credit score as much as possible before buying.

Most people understand that a good credit score boosts your chances of qualifying for a mortgage because it shows the lender you're likely to repay your loan on time. It's why many lenders have minimum required credit scores for the loans they offer.