Understand your credit score

While writing the "maximize your credit score" post, I realized I should first discuss the basics of credit scores! I'm happy to answer any questions in the comments section.



What is a credit score?

Your credit score is a measure of how reliable of borrower you are. It is developed from your credit report using one of several scoring algorithms. There are multiple scoring models developed by multiple companies; your credit score can vary depending on which algorithm a company uses.  FICO develops the most commonly used algorithms, but there are even multiple FICO algorithms. No matter which algorithm is used, the score is only based on information in your credit report.


Who cares about my credit score?

Lenders access your credit report when you apply for a credit card or loan. Leasing companies also use your credit score and payment history to determine if you’ll be a good and reliable tenant. A higher credit score means you are a less risky loan candidate (less likely to default on your loan). A higher credit score will result in lower interest rates and higher loan amounts. A low credit score may prohibit your ability to get approved for an apartment, credit card, or loan.


What is included in my credit report?

TransUnion, Equifax and Experian are the three bureaus that maintain credit reports. I recently requested by credit report from Equifax and these were the main sections included --

  1. Credit summary - your credit accounts categorized by type (mortgage, installment, revolving, other)
  2. Individual account information
    1. Open accounts - including the age of the account, payment history, current status of the account (current, past-due, etc), current balance, and the highest balance you've carried
    2. Closed accounts - positive account information can stay on your credit report for up to 10 years from the date the account is closed (this is a good thing). Negative accounts remain on your credit report for 7 years from the date the account became delinquent.
  3. Inquiries -
    1. Inquiries that may impact your credit score - the number of loan/credit card applications in the last 2 years; it's understood that people shop around for the best rates, so inquiries made around the same time period are usually factored into your credit score as one inquiry
    2. Inquiries that do not impact your credit score - this includes when you or your employer access your credit information and when companies access it to per-approve you for a credit account
  4. Negative Information -
    1. Negative accounts - delinquent payments and late payments remain on your credit report for 7 years from the date the account first became past due.
    2. Collections - accounts turned over to a collection agency
    3. Public Records - bankruptcies, law suits
  5. Personal information - identifiers, address, employment history
  6. Dispute file information - information to report inaccuracies on your credit report


Are student loans included on my credit report?

Yes. Defaulting on your student loans will negatively impact your credit score, but deferring on your loans will not.


What's a good score?

FICO scores range from 300-850. The higher the number, the better your credit - meaning the less of a risk you are to lenders. Here is a general range from nedwallet.com.

300-629: Bad credit
630-689: Average credit
690-719: Good credit
720 and up: Excellent credit

How do I improve my credit score?

See our article on maximizing your credit score!