What Are Personal Credit Scores?

Your credit score tells lenders how risky it may be to lend you money, but credit scoring isn’t as simple as one universal number. The three major credit bureaus collect your credit information, and different scoring models may use that data in different ways.

For business owners, personal credit can affect access to loans, credit cards, vendor accounts, and other financing options. This article explains how personal credit scores are calculated, why they matter, and how to improve your score.

What Are Credit Scores?

A credit score is a three-digit number, typically ranging from 300 to 850, that helps lenders estimate how likely you are to repay debt. Banks, credit card issuers, and other lenders may use your credit score when deciding whether to approve you for financing and what rates or terms to offer.

The two main credit scoring models are FICO and VantageScore. Both typically use a 300 to 850 range, but they calculate scores differently. Your score may also vary depending on which credit bureau provides the information and which version of the scoring model is used.

What Goes Into A Credit Score?

Your payment history is one of the most important factors in your credit score. Lenders want to see whether you have a history of paying bills on time.

Other factors that can affect your credit score include:

• Length of credit history
• Credit mix, such as credit cards, loans, and mortgages
• Total debt
• Credit utilization, or how much of your available credit you are using
• Recent hard inquiries on your credit report

What Is Considered A “Good” Credit Score?

There is no single official standard for a good or excellent credit score. Lenders and credit card issuers may use their own approval criteria, but credit scores are generally grouped into ranges.

At Merchant Maverick, we use the following credit score ranges:

• Poor: 300-579
• Fair: 580-639
• Good: 640-739
• Excellent: 740-850

If you don’t know your credit score, you can check it through free credit score sites or request your credit reports from the three major credit bureaus.

How Canceling A Credit Card Can Hurt Your Credit Score

Missing debt payments can hurt your credit score, but some credit-damaging moves are less obvious. One common example is closing a credit card too soon.

When you close a credit card, your total available credit may go down. If your balances stay the same, your credit utilization rate goes up, which can lower your credit score.

Closing an older card can also affect the average age of your credit accounts. However, closed accounts in good standing may remain on your credit report for several years, so the impact may not happen right away.

Before canceling a card, consider whether keeping it open could help your credit utilization or credit history.

Why You Have Multiple Credit Scores

You don’t have just one credit score. Your score can vary depending on which credit bureau provides the data and which scoring model is used.

The three major credit bureaus are Equifax, Experian, and TransUnion. Each bureau collects information for your credit report, but they may not all have the exact same data. For example, a lender may report an account to one bureau but not the others.

Your score can also change depending on the scoring model. FICO and VantageScore are the two main models, and they calculate scores differently. Many lenders use FICO scores, while many free credit score sites use VantageScore.

This means your FICO score from Experian may differ from your FICO score from TransUnion, and your VantageScore may differ from your FICO score even when both use the same bureau’s data. These differences are normal and don’t always mean something is wrong.

Why Your Credit Scores Are Important

Your credit scores can affect whether you qualify for credit and what terms you receive. A higher score may help you qualify for better credit cards, lower interest rates, and more favorable loan terms.

A lower credit score can make it harder to get approved for financing. It may also lead to higher interest rates, lower credit limits, larger down payment requirements, or fewer borrowing options.

For business owners, personal credit can also affect access to business credit cards, loans, lines of credit, and other financing. Maintaining a good credit score can give your business more options when you need funding.

Next Steps: How To Improve Your Personal Credit Score

Improving your credit score takes time, but a few steps can help.

Start by making payments on time and reducing credit card balances when possible. Lower balances can improve your credit utilization ratio, which is one of the major factors that affects your score. You may also be able to improve your utilization by requesting a higher credit limit, but only if you avoid adding new debt.

Next, review your credit reports for errors. If you find incorrect late payments, accounts you do not recognize, or inaccurate balances, you can dispute them with the credit bureau. Correcting errors may help improve your score.

Business owners should also check their business credit scores. Business credit scores are separate from personal credit scores, and improving them may require different steps.

Understanding how credit scores work can help you make better financial decisions, qualify for more financing options, and potentially access better rates and terms.

FAQs About Personal Credit Scores