The concept of credit scores started in 1989, and would evolve into today’s most popular scoring model, the FICO Score from Fair, Isaac, and Company.
Before the FICO Score, credit was determined based on the character of the consumer. Character-based decision making was popular when granting credit. For example, you could have an excellent credit score, but if the lender didn’t like something about you, they could deny you credit anyway.
This character-based decision making practice would eventually lead to the need for a more just method of scoring; one that wasn’t solely based on personal judgment and first impressions. And by 1991, all three national consumer reporting agencies were selling the FICO score to lenders. The score revolutionized the way lenders, and other businesses, assess consumer credit risk. And because it considers only credit histories, the score offers a fair and objective risk assessment that ignored subjective factors.
What Is a Credit Score?
Credit scores are three-digit numbers assigned to consumers. The number shows potential lenders how likely it is that the consumer will repay a debt if extended a loan or other form of credit.
Those three unassuming numbers are what stands between a lender denying and approving your credit or loan application. Each of the three major credit bureaus — Equifax, Experian, and Transunion — create your credit reports and scores using VantageScore and FICO Score models.
There are different scoring models, even with VantageScore and FICO, and you have multiple credit scores from different bureaus. Scores can vary depending on the type of lending or financing you’re trying to secure as well. For example, if you apply for a car loan, one scoring model may be used while an entirely different one is used if you apply for a mortgage.
Different Credit Scores
The variety of scoring models used by different companies and lenders, includes:
FICO Score: One of the most commonly used scoring models, this model gathers information from all three of the credit bureaus. When people refer to a credit score, the FICO Score is typically the one they mean.
VantageScore: This scoring model was created by the three main three credit bureaus as a way to compete with the popularity of the FICO Score model. VantageScore credit scores ranges are generally the same as the FICO Score range. There are older VantageScore models where the range varies slightly. Many lenders use this scoring model, but not as prevalently as the FICO Score model.
PLUS Score: This model was developed by Experian and is solely based on your Experian credit report. Lenders don’t use this model, and it is intended for the consumer’s educational purposes only.
TransRisk Score: TransUnion developed this model. It is based on the information in your TransUnion credit report. It considers the length and totality of your credit history. This scoring model has a range of 100 to 900 and is only used to help determine credit risk.
Equifax Score: The Equifax scoring model ranges from 280 to 850. Like the PLUS Score, it also only used for educational purposes and is not used by lenders to determine creditworthiness.
CIBIL Credit Score: CIBIL was India’s first credit bureau and is now part of TransUnion. Its CIBIL credit score is based on the Credit Information Report (CIR) and summarizes your entire history of loan and credit card payments. It ranges from 300 to 900 and plays a vital role in the overall loan and credit card approval process.
Consumers have an auto insurance credit score as well. It is a numerical point system based on different credit file characteristics. Insurance scores don’t measure creditworthiness, but are often used to help predict risk for insurance companies.
What Determines a Credit Score?
Several factors are used to determine credit scores, including:
Payment history: This is one of the biggest determinants to your credit scores. It accounts for approximately 35% of your scores. The payment history on your credit report shows lenders whether you paid your bills on time or not. If you were late making payments, the lender may view you as a higher credit risk and deny your application.
The total amount owed: This category accounts for about 30% of your total scores. You should never utilize a significant portion of the credit you have available. Doing so may make lenders feel as if you are spread too thin and can’t take on any more credit or debt. Watch your utilization ratio on each of your accounts so you can see how much you have used versus the amount of your total credit limit (the amount you have available).
Credit history length: Accounting for 15% of your credit scores, the length of your credit history is important because it shows that you have managed different credit accounts over the years. It also shows the overall age of each account, so the older your accounts are, the better it looks to a potential lender.
Credit utilization: This accounts for about 10% of your credit scores. You never want to have too many different credit accounts open at one time. You also want to avoid having too many hard credit inquiries on your credit when applying for new credit accounts or loans.Hard inquiries can negatively affect your credit scores.
Diverse credit portfolio: Lenders will check how many types of credit accounts you have. Having a variety of accounts is always better than just having credit cards, for example. A mix of an installment debt, a car loan, personal loan, and credit cards shows that you can borrow money and then pay what is owed. However, multiples types of each account can be seen as negative.
Do I Start With a Credit Score of ‘0’?
Credit scores have a lot in common with the SATs — they stress people out, involve tough-to-answer questions, and play a huge role in determining whether your loan and credit applications (instead of college) get approved or denied.
There’s another notable similarity, too, which you may not know about — when it comes to credit scores, you can’t get a zero. The only way to get a zero on the SAT is to leave it blank. And with both a credit and SAT score, you can have no score at all.
Credit Score Ranges
Most major credit scoring models, including the standard FICO Score and VantageScores, range from 300 to 850, with 300 representing the lowest, or worst, possible score and 850 representing the highest, or absolute best score. The FICO scoring model, for example, has a range of between 300 and 850. The same applies to the VantageScore. A score that is considered exceptional on these scoring models falls in the 800 plus credit score range. A poor credit score will fall under 580. Learn more about what makes a good credit score.
Some specialty credit scores, including the FICO Industry Option scores, have a lower minimum (250), but, generally, no matter what model is being talking about, “you don’t start at zero and, let’s say, work your way up to a respectable score over time,” said Barry Paperno, a credit scoring expert who worked at FICO for many years and now writes for SpeakingofCredit.com
While you won’t have a credit score of zero, you also won’t start at a 350. That’s because until you meet a model’s minimum criteria, you don’t have a score at all. In that case, the credit bureaus will let a lender (a landlord or cable company or anyone requesting your credit as part of their application process) know that you’re scoreless.
“When a score can’t be computed because the credit report doesn’t meet the minimum scoring criteria, an alpha or numeric ‘exclusion code’ is transmitted to the requester indicating that one, that no score can be calculated, and two, a general reason why the credit report didn’t meet the minimum scoring requirements,” Paperno said.
How do I Check My Credit Score?
Everyone is entitled to receive a free copy of their credit reports from each of the three bureaus each year. You can order your free credit report online from annualcreditreport.com. It is the only authorized website that provides free credit reports. Your report will include your score. You can also keep an eye on Experian score free by accessing it and a free credit report card on credit.com.
This article was originally published July 27, 2016, and has been updated by another author.