Chapter 1: Anatomy of a Credit Score

What makes up a credit score?

Your credit score, also called a FICO score, is a rating you’ve received as a result of your spending and borrowing habits. Ranging from 300 to 850, your score indicates to potential lenders how creditworthy you are. A higher credit score not only makes it more likely you’ll qualify for a loan, it can also earn you lower interest rates that will save you money over the life of a mortgage or other loan.

Why do credit scores matter?

The average credit score in the United States is 711, which falls into the “good” category. Just over 20% of Americans have “good” credit scores, while, remarkably enough, 45% of Americans have “very good” to “excellent” scores.

Why does it matter? Well, the higher your credit score, the more opportunities you have as a borrower. A good to excellent credit score can earn you the following:

• Easier loan qualification
• Lower interest rates on loans you take out
• Approval for higher loan limits

Who determines credit scores?

There are three main credit bureaus—Equifax, Experian, and Transunion—to whom lenders and creditors may report information about your spending and borrowing habits. This information goes into establishing your FICO score. While your score may vary depending on the bureau and whether or not all your creditors are reporting to all three, the following factors help determine your credit score:

• The number and type of accounts you have
• How much available credit you have versus credit you’ve used (credit utilization)
• The length of your credit history
• Your payment history – How many and the types of credit inquiries you’ve received

But what happens if you have no credit history? Maybe you’re a recent college graduate who has never had a credit card or hasn’t had one very long, and, thus, no credit file exists for you. Some 50 million Americans, in fact, have no documented credit history.

Lenders can still evaluate your creditworthiness through alternative reporting solutions like FICO Score XD, developed by LexisNexis, which evaluates your payment history for services like utilities, cell phone lines, and other public record sources.

Another source financial and lending institutions might use to determine whether or not you’re a good candidate for a loan or other banking product is your ChexSystems Score, which evaluates things like how often you’ve had an overdraft on a checking account and whether or not you’ve written a fraudulent check.