Paraphrasing from the Fair Credit Reporting Act, a credit score is a numerical value derived from a modeling system used to predict the likelihood of default (not paying back). To put it simply, credit scores are used to differentiate higher-risk borrowers from lower-risk ones. To do this, the main consumer credit scoring models, FICO® and VantageScore®, rank consumers using a 300-to-850 score range.
Credit scores are important because they are one of the core tools used by lenders to determine whether they'll grant you credit, and at what cost. If you have a great credit score, then you'll have access to competitively priced credit (lower interest rate) from many mainstream lenders. If you have poor credit scores, your options will be more limited and more expensive (higher interest rate).
How Are Credit Scores Calculated?
Both your FICO® and VantageScore credit scores consider information from your credit reports that reflect your payment history, your debt, the age and diversity of your credit reports, and credit inquiries. While the FICO® and VantageScore scoring models weigh the information slightly differently, your scores should never be wildly different if they are calculated from the same credit report at the same or similar points in time.
The most effective way to ensure that you'll have good credit scores is by paying your bills on time and maintaining low amounts of debt, specifically credit card debt. And, if you only apply for credit when you truly need it, then you won't fill up your credit reports with an excessive number of credit inquiries. Finally, scores tend to climb as the length of your credit history grows. If you perform well in all of these credit scoring categories, then you will likely have high credit scores.
What Is Considered a Good Score?
It's the lenders that decide what is and what is not a good score. Having said that, there is some general consensus on what is a good, or better, credit score.
As of as of October 2023, the national average FICO® Score☉ was 717, while the average VantageScore credit score was 701. Lenders, however, are looking for considerably higher scores if they're going to approve credit applications with their best interest rates and terms.
For example, according to Informa Research Service, the lowest average interest rates on a 30-year fixed-rate mortgage are reserved for consumers who have FICO® Scores of 760 or higher. The lowest average rates for a loan on a new car go to consumers who have FICO® scores of 720 or higher.
Will Checking Your Credit Reports Affect Your Credit Scores?
It's always a good idea to monitor your credit reports and credit scores regularly, especially since you can get so much of your credit information for free. And, checking your own credit reports will not have any negative impact on your credit scores, as long as you're accessing your credit reports from the right places.
If you check your credit reports with any of the three credit reporting companies (Experian, TransUnion and Equifax), your scores will not be impacted at all. The same goes if you check your credit reports through www.AnnualCreditReport.com
Checking your credit via either of these reputable methods will result in what's called a "soft" credit inquiry being placed on your credit reports. Soft credit inquiries do not affect your credit scores.
Be careful, however, not to ask connections who work at car dealerships or mortgage brokers to access your credit reports as a favor. This will result in what's called a "hard" credit inquiry being placed on your credit reports. Hard inquiries are usually the result of a consumer applying for some form of credit. While hard inquiries do not always impact credit scores, they can.
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