As we move into 2020, credit continues to be a buzzword for consumers, but many people are unsure what part credit plays in their personal finances. In a new 5-part series, Credit 101, Ilyce Glink, an award-winning personal finance columnist and CEO of the financial wellness platform Best Money Moves, details important information you need to know about your credit reports and scores. Create a myEquifax account (at www.myEquifax.com) to receive six free Equifax credit reports every 12 months.

Most consumers understand that there is a relationship between credit scores and the terms of credit accounts extended to you: the higher credit scores, the more likely you are to receive better offers on your various credit accounts.

Creditors may extend better offers to consumers with high credit scores because higher credit scores generally indicate that you have demonstrated positive behavior with your past credit accounts. That’s why it’s important to continue to build up and then maintain a history of positive credit behavior.

Understanding how credit scores are calculated can help you make credit-smart choices going forward.

Our Credit 101 Series, sponsored by Equifax, answers common questions about your credit reports and credit scores, and how those scores are calculated. (Find other posts in the Credit 101 Series here.) 

What Are Credit Scores?

While your credit reports outline the details of your credit history, credit scores summarize your credit history in a number. Credit scores generally range from 300 to 850 and are calculated using a variety of information about your past credit behavior taken from your credit reports. Lenders and creditors may use credit scores to help determine whether or not to approve you for credit and on what terms.

Contrary to what many consumers believe, you don’t have just one credit score. The three nationwide consumer reporting agencies, Equifax, Experian and TransUnion, as well as other credit scoring companies such as FICO and VantageScore, each have their own methods for calculating credit scores. These companies may also develop industry-specific credit scoring models for lenders and creditors based on the type of credit product they are providing, such as a mortgage versus an auto loan.  

There are also some credit scores that are provided to consumers only, which are not used by lenders and creditors. Since credit scores vary based on provider, industry and product, these consumer-only credit scores (sometimes referred to as educational credit scores) are intended to give consumers a general understanding of their credit position and help them understand how their financial behaviors may impact their credit scores.

How Are Credit Scores Calculated?

The three nationwide consumer reporting agencies and other reporting companies calculate credit scores based on information in your credit reports, as reported by your lenders and creditors. Each CRA or other reporting company has its own formulas for calculating its credit scores, but they generally take the same basic information into consideration:

1. Payment history. How timely you pay your debt is generally the most important indicator of how you’ll repay future debt you take on. Credit scores reflect your payment history among your credit accounts and can cover information about credit cards, retail cards, loans and more. They may also factor in negative information such as bankruptcies, foreclosures, wage attachments and accounts that have been reported to collection agencies.In many credit scoring models, payment history is the largest percentage of your score, so it’s important to keep up to date with payments.  Making your payments shows prospective creditors that you know how to properly manage credit that is extended to you.

2. The amount you owe vs. total available credit. Also called your credit utilization rate, this ratio refers to the total amount of credit you’ve borrowed compared with the total amount you’ve been offered for each credit account. Using a high percentage of your allotted credit could suggest to lenders and creditors that you are having trouble managing your debt. Lenders and creditors generally like to see a credit utilization of less than 30 percent.

3. Types of accounts. Lenders generally prefer to see a mix of different types of credit accounts on your reports, meaning both revolving debts (such as credit cards) and installment loans (such as student loans or mortgages). Responsibly managing different types of accounts at once may help suggest to lenders that you are capable of understanding and maintaining whatever type of credit account for which you may apply.

4. The total number of accounts you have. One persistent credit myth is that having a specific number of credit accounts automatically translates into higher credit scores. While there is no magic number of accounts you need, it is true that having too few credit accounts could mean a credit reporting agency or other company may not have enough information to generate a credit score.

5. Length of your credit history. The length of time you have managed your credit accounts can be a factor in how credit scores are calculated. Lenders and creditors generally like to see a longer credit history, as it can demonstrate that you are able to maintain credit accounts.

Again, it’s important to remember that while most credit reporting agencies and companies calculate credit scores using the same factors, those factors may be weighted differently from agency to agency. Additionally, credit scores are not only dependent upon the scoring model used but also on which credit report the data is taken from. A consumer could have different information from one credit report to the next because not all lenders and creditors report to all three agencies. So credit scores may vary depending on which agency provides them.

What’s Considered a “Good” Credit Score?

Credit scores usually range from around 300 (the lowest) to 850 (the highest) and change over time based on your borrowing and repayment history. 

Because there’s no one credit score used by all lenders and creditors, what’s considered a “good” credit score may vary. Higher credit scores may suggest to lenders that you’ve demonstrated responsible credit behavior in the past, which may make lenders and creditors more confident when evaluating a request for new credit.

Lenders generally see those with credit scores 670 and up as acceptable or lower-risk borrowers.  

However, keep in mind that exact numbers may depend on the model used to calculate your credit scores. When you receive a credit score, look to see if the agency or other company from which you pulled it offers a reference for how they calculate the score.

Where Can I Check Credit Scores?

Contrary to popular belief, credit scores are not part of your credit report but instead may be requested separately from each of the three nationwide reporting agencies or from other reporting companies.

Through Equifax Core Credit™, you can get a free monthly Equifax credit report and a free monthly VantageScore 3.0 credit score, based on Equifax data. (A VantageScore is one of many types of credit scores). to enroll, visit www.myEquifax.com to create a myEquifax account, then click “Get my free credit score” to enroll in Credit Core.

This article is part of our Credit 101 series, where we break down information about your credit reports and credit scores. Read more about credit reports on Equifax.com: 

What is a Credit Score?
What is a Good Credit Score?

Read more of the series Credit 101 series here: 

Credit 101: What’s in Your Credit Reports?