Since 1989, credit bureau risk scores, aka credit scores, have been commercially available and part of the U.S credit system. We gained access in the early 2000s when various websites first included scores as part of subscription or other fee-based services. Nowadays, credit scores are free, thanks to lenders and credit card lead generation websites. And yet, despite 24-7 access, we’re not as savvy as we could be.
Ready for a quick tutorial? Let’s break down the details and need-to-knows.
A credit bureau score is a three-digit number that summarizes the information on your credit reports. There are two brands of credit scores primarily used in the United States. Ever heard of FICO and VantageScore? Credit bureaus use their models to calculated well over 15 BILLION scores each year. The industry standard score range, or “scale,” for both brands is 300 to 850.
When calculating scores, credit scoring models consider several categories of information, including credit usage, the presence or lack of negative information, inquiries (a record of lenders accessing your credit report/s), the age of your credit report and the diversity of your credit experiences. Within each of these categories is a variety of metrics that themselves are worth a specific number of points, more formally referred to as “weight.”
What do lenders see when they look at those three numbers? The interpretation of your credit score, be it a 650 or an 800, has an actual meaning well beyond “it’s good” or “it’s bad.” Your score has an associated probability or likelihood that you’ll go 90 days (or longer) past due on an account in the 24 months after the score is calculated. Higher scores mean less likely; lower scores mean more likely. The users of credit scores understand these probabilities, and assign loan terms, such as interest rates and credit limits, based on them.
The definition of “good” credit score? It depends on the lender you talk to and the credit-related product you’re talking about. Generally speaking, borrowers with scores of 720 or higher are offered the best published interest rates for auto loans. Borrowers with scores of 760 or higher are offered the best published rates for mortgage loans. The gist is this: If you want the best deal a lender can offer, you want to shoot for 760 or higher.
This is the least complicated part of the equation and totally within your control: credit habits. If you make all your payments on time and maintain no or low credit card balances, you are guaranteed a good credit score.
You’re feeling stoked. Good. Now a word of advice about missed payments. You may think, “big deal,” but missed payments can have quite an effect on your FICO and VantageScore credit scores. If you miss payments, your credit reports will become polluted with a record of those late payments and your scores will slide downhill. And we all know how bad stuff loves to stick around. Most late payments, collections and defaulted accounts can remain on your credit reports for up to seven years. It’s a long time to wait to fully recover a once-stellar credit score.