Personal Credit Scores Explained: Everything You Need To Know To Understand, Access, & Improve Your Credit Score

You probably know that your credit score is supposed to indicate to creditors (and other entities) how risky it is to lend you money. However, it isn’t as straightforward as many people imagine. Did you realize that three separate credit bureaus evaluate your credit and that there are multiple scoring models used to interpret the data provided by each of these bureaus?

If you own a business, you may well be working with many different credit providers. That’s why you need a solid understanding of credit scores and how they work. This article explains how credit scores are calculated and how you can improve your personal credit score.

What Are Credit Scores?

Personal Credit Scores Explained

Your credit score — a number ranging from 300 to 850 — is used to assess the likelihood that you will repay your debt. This is why banks and other lenders use it to determine whether or not to lend to you.

So just what information goes into determining your credit score?

What Goes Into A Credit Score?

The number one factor for what goes into calculating a credit score is your payment history. After all, what better way to determine the likelihood you’ll pay your bills on time than to look at whether or not you have a history of doing so?

Other factors that affect your credit score include:

• The amount of time you’ve had credit (the longer, the better)
• The types of credit you have (credit cards, mortgages, loans, etc.)
• Your total debt burden
• Your credit utilization ratio (your current debt divided by your credit limit)
• The number of hard inquiries on your credit report

What Is Considered A “Good” Credit Score?

It’s important to note that there is no single official standard for what is a “good” credit score or an “excellent” credit score. Every credit-evaluating institution has its own standards, but there is some general agreement on what constitutes a decent score and what does not.

Merchant Maverick assesses credit scores as such:

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

Things That Can Negatively Impact A Credit Score

Given the factors we discussed above that determine your credit score, one thing that could certainly hurt your credit score is missing required debt payments. Other credit-damaging actions, however, may be less obvious.

Prematurely Canceling A Card

When you cancel a credit card — even one you don’t typically use — you negatively affect your credit utilization ratio by reducing your total credit limit. This means that while your total credit balance remains the same (unless you close a credit card without paying it off, which we don’t recommend, as you’ll still be responsible for the debt), your available credit goes down. As a result, your total credit utilization rate rises, thus dinging your credit score.

What’s more, closing an older credit card can lower the average age of your credit cards, which is another thing that can lower your credit score. However, a closed credit card will generally stay on your credit file for ten years, so this particular negative impact likely won’t happen for a while.

Why You Have Multiple Scores

You might think that your credit score is one specific score compiled by one scoring institution, but no, this isn’t the case.

As it turns out, there are three different credit bureaus — TransUnion, Equifax, and Experian — and each one evaluates your credit independently of one another. These credit bureaus gather information about you and your finances while compiling this information into credit reports. By law, you can request a free copy of your credit report from each credit bureau once per year. However, these reports do not actually contain your credit score, just the information your score is based on.

When evaluating you for credit risk, most lenders will check your FICO score. Your FICO score uses the data in your credit report from one of the three credit bureaus and assigns you a score based on the FICO scoring model. Just know that your FICO TransUnion score may differ from your FICO Experian score or your FICO Equifax score. That’s because the three credit bureaus may not have the same information about you, as a lender may report to one credit bureau but not another. So the FICO scores produced by each set of information may differ a bit.

FICO isn’t the only credit scoring model out there, however. VantageScore is a competing credit scoring model — one used by most free credit score websites. VantageScore weighs your personal financial history somewhat differently than FICO does. Your VantageScore may differ from your FICO score, even when the data comes from the same credit bureau. However, the differences won’t be dramatic (payment history is highly influential in both models). If your VantageScore is in the “good” range, your FICO score is likely to be as well.

Why Your Credit Scores Are Important

For better or worse, your credit scores play a significant role in determining your access to credit. If your credit score falls short of what your potential creditor wants to see, it could imperil your ability to get a mortgage or an auto loan.

Your credit scores not only determine your ability to access credit — they also determine the quality of the credit you can access. For instance, with a poor credit score, you’re likely to qualify for only the most basic of credit cards. These credit cards usually carry higher interest rates than the cards available to those with better credit scores.

Likewise, you’ll be subject to a higher interest rate on a loan if you only have a mediocre credit score than you would with an excellent credit score. Additionally, with a lower credit score, a bank may compel you to make concessions to obtain a mortgage — concessions you wouldn’t have had to make with a higher score.

If you’re running your own business, access to credit is of paramount importance, making it all the more critical that you maintain a decent score!

FAQs About Personal Credit Scores

Next Steps

Now that you know what goes into determining your credit scores and how they can affect your life, how can you track and improve your credit score?

Check Your Credit Score For Free

You can request a free copy of your credit report from each of the three credit bureaus once a year. However, these reports do not contain an actual score.

Thankfully, several websites offer free access to your credit score (typically your VantageScore). These sites may also offer other services, such as credit monitoring, notifications when something new appears on your credit report, credit card recommendations tailored to your particular credit profile, customized advice to improve your credit, and more.

Check out our article on the best free credit score sites to get a thorough rundown of the leading credit score services.

Final Thoughts: How To Improve Your Personal Credit Score

Advice such as “pay down your credit card debt” can sound tin-eared since people tend to take on debt only out of necessity — particularly these days. However, the fact remains that doing so is the quickest way to benefit your credit score. Paying down credit card debt reduces your overall debt burden and improves your credit utilization ratio, both of which have a positive impact. Getting a credit line increase is another way to boost your credit utilization ratio and, in turn, your credit score.

You can also potentially improve your credit score by going over your credit reports and disputing any errors that you might find. Credit bureaus do make mistakes — in fact, it’s one of the arguments against their primacy in determining Americans’ access to credit. It’s not uncommon to see an improvement in your credit score after successfully disputing a mark on your credit report. Unfortunately, there are three different credit bureaus that could have reports containing damaging errors.

Check out our guide to disputing errors on your credit report if you think one of the credit bureaus might have done you wrong.

Other ways to improve your credit include applying for a new credit card and keeping old accounts open, even if you aren’t using them. Both of these actions benefit your credit utilization ratio. Of course, the fact remains that nothing helps your credit score as much as missing a scheduled debt payment will hurt it. That’s why it pays to prioritize paying your bills on time above all else.

Lastly, while we’ve explained personal credit scores in this article, your business credit score is another thing entirely. Read our article on business credit scores if you’re running a business or if you plan to do so.

For more on credit scores and how to improve them, check out the following links!

• 5 Ways To Improve Your Personal Credit Score
• How Long Does It Take To Improve My Credit Score?