Understanding Credit Scores: A Comprehensive Guide

In today’s financial landscape, having a good credit score is crucial. It can significantly impact your ability to secure loans, credit cards, and even housing. At O1ne Mortgage, we understand the importance of maintaining a healthy credit score, and we’re here to help you navigate the complexities of credit scoring. Call us at 213-732-3074 for any mortgage service needs.

What Is a Good Credit Score?

Credit scores typically range between 300 and 850. A score of 700 or above is generally considered good, while a score of 800 or above is excellent. Most consumers have credit scores that fall between 600 and 750. In 2023, the average FICO® Score in the U.S. reached 715. Achieving a good credit score can help you qualify for loans and credit cards with lower interest rates and better terms.

What Is a Good FICO® Score?

The base FICO® Scores range from 300 to 850, with a good credit score falling between 670 and 739. FICO also creates industry-specific credit scores for credit card issuers and auto lenders, which range from 250 to 900. However, the middle categories have the same groupings, and a “good” industry-specific FICO® Score is still 670 to 739.

What Is a Good VantageScore?

VantageScore’s latest models (VantageScore 3.0 and 4.0) use a 300 to 850 range, similar to the base FICO® Scores. For these models, a score between 661 and 780 is considered good.

What Affects Your Credit Scores?

Several factors can impact your credit scores, often categorized into five main areas:

• Payment history: Making on-time payments can boost your scores, while missed payments, collections, or bankruptcy can hurt them.
• Credit usage: This includes the number of accounts with balances, the amount owed, and your credit utilization rate.
• Length of credit history: This considers the average age of all your credit accounts, as well as the age of your oldest and newest accounts.
• Types of accounts: Managing both installment accounts (like car loans) and revolving accounts (like credit cards) responsibly can help your scores.
• Recent activity: This looks at whether you’ve recently applied for or opened new accounts.

FICO® Score Factors

FICO uses percentages to represent the importance of each category:

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

VantageScore Factors

VantageScore lists factors by their influence on your credit score:

• Total credit usage, balance, and available credit: Extremely influential
• Credit mix and experience: Highly influential
• Payment history: Moderately influential
• Age of credit history: Less influential
• New accounts opened: Less influential

Why Having a Good Credit Score Is Important

Having a good credit score can make achieving your financial goals easier. It can be the difference between qualifying or being denied for a loan, such as a home mortgage or car loan. It can also impact the interest rates and fees you’ll pay if you’re approved. For example, the difference between a 620 FICO® Score and a 670 FICO® Score on a 30-year, fixed-rate $250,000 mortgage could be $161 a month, saving you $57,842 in interest payments over the loan’s lifetime.

Additionally, credit scores can affect non-lending decisions, such as whether a landlord will rent you an apartment. Some employers may review your credit reports before making hiring or promotion decisions, and insurance companies may use credit-based insurance scores to determine your premiums.

How to Improve Your Credit Scores

Improving your credit scores involves focusing on the underlying factors that affect them. Here are some steps you can take:

• Make at least your minimum payment and make all debt payments on time. Even a single late payment can hurt your scores and stay on your credit report for up to seven years.
• Keep your credit card balances low. A low credit utilization rate can help your scores. Those with excellent credit scores tend to have an overall utilization rate in the single digits.
• Open accounts that will be reported to the credit bureaus. These could be installment accounts, such as student, auto, home, or personal loans, or revolving accounts, such as credit cards and lines of credit.
• Only apply for credit when you need it. Applying for a new account can lead to a hard inquiry, which may hurt your credit scores a little.

Other factors can also impact your scores, such as the average age of your accounts. Checking your credit scores can give you insight into what you can do to improve them. For example, when you check your FICO® Score 8 from Experian for free, you can see how you’re doing with each of the credit score categories and get an overview of your score profile.

What to Do if You Don’t Have a Credit Score

Credit scoring models use your credit reports to determine your score, but they can’t score reports that don’t have enough information. For FICO® Scores, you need an account that’s at least six months old and has been active in the past six months. VantageScore can score your credit report if it has at least one active account, even if the account is only a month old.

If you aren’t scoreable, you may need to open a new account or add new activity to your credit report to start building credit. This often means starting with a credit-builder loan or secured credit card, or becoming an authorized user. You can also use Experian Boost® to get credit for certain qualifying bills, such as utility bills, streaming subscriptions, and eligible rent payments.

Why Your Credit Score Changed

Your credit score can change for many reasons, and it’s not uncommon for scores to move up or down throughout the month as new information gets added to your credit reports. Specific events, such as a late payment or new collection account, can lower your score, while paying down a high credit card balance can increase it.

Sometimes, actions might have an unexpected impact on your credit scores. For example, paying off a loan might lead to a drop in your scores if it was the only open installment account on your credit report. Similarly, avoiding debt by not using your credit cards could lead to a lower score due to lack of activity.

Monitor Your Credit Report and Score

Checking your credit score before applying for a new loan or credit card can help you understand your chances of qualifying for favorable terms. Checking it further ahead of time gives you the chance to improve your score and potentially save hundreds or thousands of dollars in interest.

Experian offers free credit monitoring, which includes alerts if there’s a suspicious change in your report. Keeping track of your score can help you take measures to improve it, increasing your odds of qualifying for a loan, credit card, apartment, or insurance policy—all while improving your financial health.

At O1ne Mortgage, we are committed to helping you achieve your financial goals. If you have any questions or need assistance with your mortgage needs, don’t hesitate to call us at 213-732-3074. We’re here to help you every step of the way.