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Credit Score Guide

April 28, 2020

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Your credit score can impact your ability to borrow money and access certain financial products throughout your life. Pretty important stuff, right?

That’s why we’ve put together this Credit Score Guide to help you learn the basics of how credit scores work and share some tips on building and improving (or repairing) your score. By the end of this guide, you’ll hopefully have a better understanding of your score and why it’s vital to keep that score within a good range.

Let’s get started.

What we’ll cover

What is a credit score and why does it matter?
Credit score ranges: What does your credit score really mean?
What can affect your credit score?
How to build credit
How to improve or repair your credit score

What is a credit score and why does it matter?

Your credit score is a measurement of how likely you’re able to pay your bills or repay your loans on time. When a bank or lender looks at your credit score, they are trying to gauge the risk of lending money to you — in effect, asking the question: Will this individual be able to pay us back?

Generally, a credit score can range anywhere between 300 and 850. But sometimes you may see scores as high as 990 — it all depends on the scoring model that’s being used. There are many different scoring models out there (e.g., FICO, VantageScore, TransRisk, etc.), and each model uses a different methodology to calculate your score. Later in the guide, we’ll take a look at some of the factors that are taken into consideration and how they could affect your credit score.

Highlights:

Your credit score is a measure of your “creditworthiness.”
Generally, a credit score ranges between 300 and 850.
The higher your credit score, the more likely you’ll receive competitive terms when applying for a loan.

But the important thing to know for now is that the higher your score, the more financially responsible or “creditworthy” you are.

You may be wondering why any of this information matters. Well, anyone who has ever applied for a credit card or a loan can appreciate the importance of having a “good” credit score. Not only can your credit score affect your ability to borrow, but it also helps determine how much interest you would be charged. Typically, people who have high credit scores tend to enjoy better loan or credit terms. This can mean lower interest rates, lower down payments or a higher credit limit. Pretty sweet, right?

On the other hand, if your credit score falls into the lower end of the range, you might have a more difficult time securing a loan or line of credit. And even if you’re able to borrow money, lenders tend to charge a higher interest rate, which reflects the risk they’re taking on in lending you that money.

Your credit score may even impact your ability to score a date on the dating circuit. According to a 2019 survey by Bankrate, more than 21% of women said that someone’s credit score would have a large impact on their interest in dating them. And there’s at least one dating website that uses credit scores to help you find a prospective date. Kind of puts a different spin on “interest rates,” huh?

Credit score ranges: What does your credit score really mean?

If someone tells you that they have a credit score of 650, what does that mean? Sure, we know a higher score is better than a lower score. But there's more to it than that. This is where credit score ranges come into play.

Credit score ranges are what gives context to your actual credit score number — in other words, they put some meaning behind your score.

Let’s look at the general FICO credit score ranges below as an example.

Poor: Below 580
Fair: 580 – 669
Good: 670 – 739
Very Good: 740 – 799
Exceptional: 800+

Highlights:

Generally, your score falls into one of the following credit score ranges: Poor, Fair, Good, Very Good, Exceptional.
Individuals with a credit score below 670 are typically considered subprime or risky borrowers.
It’s normal for credit scores to fluctuate slightly month to month — generally, minor changes in your score are not a cause for concern.

Keep in mind that these ranges are general guidelines. Each lender can decide for themselves what’s considered a “good” score — their interpretation may or may not always align with FICO. They may also look at other aspects of your financial history in deciding whether to extend you a loan or line of credit.

That said, according to FICO, a “good” credit score starts at 670, which generally means that you’re creditworthy in the eyes of lenders. Having a "good" or an “exceptional” credit score can increase your chances of securing loans at competitive rates.

People with scores below 670 are generally viewed as “subprime” (translation: risky) borrowers, and they’re likely to face higher interest rates from lenders. Meanwhile, individuals whose credit scores fall below 580 or within the “poor” credit range typically have a harder time qualifying for loans.

See how you could simplify your credit card debt into a single loan with a fixed rate Marcus loan.

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Why your credit score range is important

These days it’s relatively easy to check your credit score. Many credit card and personal finance companies offer free credit scores. The ease of checking your score might lead some folks to obsessively monitor those three little digits. But don’t get too bogged down by your exact score and panic whenever it fluctuates slightly. It’s important to put the number in context — in other words, your credit score range deserves some attention, too.

Remember earlier when we said there are many different credit scoring models? Well, your credit score can mean different things under different models. Put another way, a score can fall into different ranges depending on the model that’s being used.

For example, while a score of 665 places you into the “good” credit score range under the VantageScore 3.0 model, that same score is only considered “fair” under the FICO scoring model. So in this case, saying you have a score of 665 without the context of what that score actually means may not be all that helpful in terms of predicting your ability to borrow money.

Bear in mind that it’s normal for your credit score to fluctuate month to month. Depending on which range you end up landing on, these fluctuations may or may not be significant.

Let’s stick with the FICO model to illustrate this point. If your FICO drops from 780 to 775, you’re still within the “very good” credit score range, so this five-point drop, generally speaking, shouldn’t cause an alarm.

But if a score goes from 670 to 665, this five-point drop might be a little more concerning because now you’ve dropped out of FICO’s “good” credit range and down into its “fair” range. This might make it slightly harder for you to predict whether you would be able to receive competitive borrowing terms.

Generally, you shouldn’t worry if your score drops or ticks up by a few points from month to month if it doesn’t impact your credit score range. Whether you have a FICO Score of 800 or 805 matters little: You’re exceptional in FICO’s eyes either way!

What can affect your credit score?

Alright, so fluctuations in your credit score are bound to happen. But what accounts for the ups and downs? Generally, the following factors all have a role to play in your credit score:

Payment history (e.g., is there a history of late payments?)
Credit utilization rate (amount owed vs. amount of credit available)
Length of credit history
Credit mix (types and numbers of credit accounts and/or loans)
Number of new or recently opened credit accounts
Certain public records such as bankruptcy
Total debt
Number of inquiries into your credit report

Highlights:

A number of factors can affect your credit score, including credit utilization, number of new credit accounts and total debt.
Certain factors will matter more than others depending on the scoring model that’s being used to calculate your score.
Under FICO, the three most influential factors are payment history, amounts owed and length of credit history.

Each of these variables is weighted differently depending on the credit scoring model that’s used. This means some categories are more influential than others when it comes to calculating your credit score. Here’s how FICO breaks them down:

Payment history = 35%
Amounts owed = 30%
Length of credit history = 15%
Credit mix = 10%
New credit = 10%

Learn more: Why Did My Credit Score Drop? and What Is the Average Credit Score?

How to build credit

Building good credit can be tough if you don’t have a credit history to begin with and have to start from scratch.

If you’ve been managing credit cards and/or loans for a good chunk of your life, this may not apply to you. But young people who are just stepping into adulthood often face this challenge. Fortunately, there are a number of ways to build credit.

Here are a few common options to consider:

Opening a credit card account. If you have trouble opening a traditional account due to the lack of a credit history, consider opening a secured credit card or becoming an authorized user on someone else’s account (e.g., parents).
Paying bills on time. Since payment history is one component of your credit score, paying bills on time can help build a positive credit history. These bills may include student loans, auto loans, utility bills and rent. You may have to ask your utility companies and your landlord to report your payment history to the major credit bureaus, as these types of payments are typically not reported (unless you’re delinquent).
Watching your credit utilization. If you’re able to get a credit card, congrats! But it’s important to use that line of credit responsibly. Maxing out your credit card every month can hurt your credit score. On the other hand, keeping your credit utilization rate low can positively impact your score.

Learn more: How to Build Credit and New to the US? Here’s How to Establish Credit

How to improve or repair a credit score

In a way, your credit score is like a report card for your credit. Have you been using and managing your credit cards responsibly? Have you been paying your bills on time?

If you’ve hit some bumps on your credit journey, fret not. There’s hope! Improving or repairing a low credit score is totally possible. Here are some helpful tips to keep in mind:

Understand the various factors that can impact your credit score.
Pay your bills on time.
Apply for credit only when you need it and maintain a low credit utilization ratio.
Keep old credit accounts open.
Check in on your credit score and credit report regularly, correcting any mistakes as soon as possible. Fun fact: Did you know that each of the three major credit bureaus (i.e., Equifax, Experian and TransUnion) is required by federal law to provide consumers a free credit report every 12 months if you request it?
Be patient and give it time. We know this one might be particularly hard, but hang in there. Keep in mind that the negative events or dings on your credit report will have less impact as time passes.

Get more details on these tips here: How to Improve Credit Score and How to Repair Credit

Some parting thoughts

“A good credit score is one you are working to improve.” FICO is right about that. Achieving a good score is not a one-and-done deal. Maintaining it requires vigilance and diligence. And it starts with making sure you understand the basics of how credit scores work. Hopefully, this Credit Score Guide has helped to build up your foundational knowledge.

Can’t get enough of our credit score explainers? We have a few more on how your credit score can impact your ability to secure a personal loan, buy a car and buy a house.

Best of luck on your credit journey — you got this!

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.