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Your Credit Score Explained

It’s one of the most important numbers when it comes to your financial life… Your credit score is a cue to lenders of how likely you are to pay back a loan. The higher your score, the more financially “trustworthy” a lender is likely to deem you. Your “creditworthiness” increases your possibility to secure loans more easily and with potentially lower rates (saving you money). If you have a lower credit score, you may still be approved, but at higher interest rates or at terms you may not prefer.

A healthy credit score is critical, but many Americans consider them a mystery. In fact, over half of Americans say they never check their credit scores. An annual survey from VantageScore Solutions and the Consumer Federation of America demonstrates knowledge of credit scores is at an 8-year low. Citizens Bank is here to help you understand what goes into your credit score.

What is a Good Credit Score?

Whether using a FICO score model or a VantageScore model, credit scores range from 300 to 850- the higher the number, the better the score. Scores are generally broken down as follows:

  • Excellent: 800 to 850
  • Very Good: 740 to 799
  • Good: 670 to 739
  • Fair: 580 to 669
  • Poor: 300 to 579

When you apply for credit, whether it be an auto loan, mortgage, or credit card, this number is an indication of the risk the lender will be taking by lending you money. The higher the number, the lower the risk to the lender. Your credit score will change over time based on your behavior, so it is important to monitor it. Especially when that number means you are more likely to secure a loan or receive lower interest rates.

Components of a Credit Score

Lenders most commonly use two different types of credit scores, FICO scores and VantageScore. Using these scoring systems, your credit score is calculated based on components of your credit history, including:

  • Payment history: Have you paid your payments on-time and in-full? Missing a payment or only paying it partially will decrease your score.
  • Age of credit: Age of credit is averaged across all accounts. The longer you’ve been establishing credit, the better. This is why it is some institutions recommend to not close an account (like a credit card), even if it is paid off.
  • Number of open accounts: Lenders like to see that you have a good mix of accounts open, ranging from loans to credit cards. 
  • Credit utilization: How much of your available credit are you using? This is a reflection of responsible credit utilization. Your ability to balance building credit while not using all that is available can be a good demonstration of your ability to handle additional credit
  • Total levels of debt: The total amount of debt you have can hurt you in certain cases. If you have a large amount of credit card debt combined with high credit utilization or a lot of money still owed on your loans out of the original amount borrowed (you aren’t making payments), your debt levels will lower your credit score. This is not to say more debt = lower credit score, as long as you are making on time payments and not maxing out credit cards.

Each factor in your credit score has a different impact, from high to low. Meaning they will be weighted differently in your credit score. The numbers show you should be paying the most attention to making your payments on time and keeping debt down. According to Investopedia, payment history counts for 35% of a credit score, total levels of debt counts for 30%, and average age of credit counts for 15%. While other factors are still important, they are weighted less.

Note that while the above pieces are most important, there are other numbers that go into calculating your credit score, such as public records (like if you’ve ever filed for bankruptcy), how many new credit accounts you've recently opened and the number of inquiries for your credit report (new accounts you’ve tried to open/ loans you have tried to secure). You can find a list of what goes into a FICO score here and how a VantageScore is calculated here

How Do You Stack Up?

The average FICO score in 2019 in America was 695 and the average Vantage score stood at 673. Where do you stand? For more information, or to open a credit card with Citizens Bank to help build your credit, contact one of our experts. We’re here to help guide you through what can be a confusing, but extremely important, number.

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