Credit, as you may already know, is your ability to borrow money or enter into agreements based on an understanding between you and the financial institution loaning the money that you’ll pay the money or obligation back later. A financial institution will use your credit score to assess default on the amount of money that you owe (i.e., going 90 days or more without paying a debt obligation).
Financial institutions have used credit scores for decades to help determine the risk that a borrower does not make a payment towards the underlying debt. The higher a consumer’s credit score, the better the rates and deals the consumer may be able to secure when accessing credit.
Simply put: the better your score, the more likely it is that you will pay less to borrow, so it’s crucial that you understand how your consumer credit score comes together. Below, we’ll walk you through the way a VantageScore credit score is generated.
Your Credit Report
A credit scoring model is the main mechanism that generates a credit score. (More information on VantageScore’s credit scoring models is available here.) Credit scoring models pull from the information in a consumer’s credit reporting file maintained by one of the three Nationwide Consumer Reporting Agencies (NCRAs): Equifax, Experian, and TransUnion. Your score depends almost entirely on the information in the consumer data file and its accuracy.
This contrasts with information that isn’t in your consumer credit reporting file and does not impact your credit score. Your address, age, employment, ethnicity, level of education, or political affiliation are all excluded from your credit report and, therefore, have no impact on your credit score.
Which Factors May Impact My Credit Score?
VantageScore credit scores are influenced by several different categories of information from your credit report. Some are highly influential, such as payment history, while others are less so, like how many new accounts you recently opened. To be sure, every credit reporting file is different, and individual credit scores are specific and unique to each consumer. That said, there are some similarities in how credit scores are determined. Below is a list of several factors that can positively or negatively impact your VantageScore credit score, ranked in order from most impactful to least:
- Your Payment History: Payment history is exactly as it sounds – your history of making on-time and in-full payments as agreed upon with your lenders. Making late payments is the one of the most important factors to negatively impact your score. Other important factors that can negatively impact your payment history include collections, bankruptcies, foreclosures, settlements, defaults, or repossessions.
It’s always best practice to make all of your payments on time, but that alone doesn’t guarantee a high credit score.
CREDIT SCORE TIP: Set calendar reminders to ensure you never miss a payment due date.
- Total Credit Usage: Total credit usage may also negatively influence your credit score. Total credit usage looks at the total amount of credit available to you. While having debt is not a bad thing, having high credit card balances can lower your credit score. Generally, if you’re aiming for “good” or “excellent” credit, you should use 30% or less of the total credit available to you, especially as it pertains to credit card debt.
CREDIT SCORE TIP: To lower your total credit usage, try to bring your credit card balances under 30%.
- Credit Mix and Experience: Credit Mix and Experience is the third highly influential category, which can help build or increase your credit score. Having different types of credit, such as a car loan, a credit card, and a mortgage, shows lenders you’re able to manage multiple debt obligations responsibly. In addition, the longer you’ve had a credit account, the better your score, which is why establishing good credit early is important.
CREDIT SCORE TIP: Take steps to vary the types of credit accounts you carry.
- New Accounts Opened: The number of new accounts opened in a short period of time may also negatively impact your credit score. To avoid this result, you should be sure to reasonably space out your applications for credit. Too many new accounts opened in a short amount of time can result in denial of credit.
CREDIT SCORE TIP: If you need to open multiple credit accounts, try to space them out.
- Balance and Available Credit: Although less influential than other factors, your ability to pay down your credit balances and keep a high amount of credit available demonstrates that you have financial flexibility, which signals to lenders that you’re a responsible borrower with a high likelihood to repay your debt obligations.
CREDIT SCORE TIP: Keep your balances low by making timely and consistent payments.
Summary
VantageScore credit scores have a score range of 300 on the low end and 850 on the high end. The higher your credit score, the more likely it is that you will have access to more favorable interest rates, which will save you money in the long term. A higher VantageScore credit score will also see you as less risky to lenders, which will encourage them to compete for your business by offering credit products at better rates.
To maintain a high credit score, consider each of the factors listed above. If you find yourself deficient in any one category, identify strategies to improve, such as paying each debt obligation on time, keeping your card balances low, and only applying for credit as needed.
Test Your Knowledge!
If you’re still looking to learn more about your VantageScore credit score, feel free to take the VantageScore Consumer Credit Quiz and read through additional educational materials in our Consumer Blog.
