Credit Score 101: Need-to-Know Basics About Why This Number Matters

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Thinking about buying a car or your first home? Whether you’re in the market now or plan to save for a few years first, your credit score will come into play when you apply for a loan.

On first glance, credit scores seem simple: The higher your score, the better. People with higher scores are more likely to qualify for loans with lower interest rates, making payments more affordable.

The not-so-simple part of credit scores? Understanding what goes into your score and what you can do to improve it. Different aspects of your credit history determine your score — but some factors weigh more heavily than others. What’s more, your credit score can change by the month.

Knowing the ins and outs of your credit score can help get you ready to apply for your next loan, get approved and get the best possible loan terms.

Why your credit score matters

Your credit score is a three-digit number that represents your credit history. It helps lenders decide whether or not they're willing to give you a loan for a car, house or another large purchase.

A higher credit score indicates that you’ve been a responsible borrower in the past. People with high scores have established credit history, make on-time payments and maintain low debt-to-credit ratios.

Lenders see applicants with lower scores as riskier and more likely to default. Lower scores are usually a result of having little-to-no credit history, missing payments or taking on too much debt.

Most lenders will check your FICO^® credit score, which ranges from 300 to 850. 

• Exceptional: 800 and above. You’re probably a slam dunk for approval with the lowest possible interest rate.
• Very Good: 740-799. Approval chances are still high, but the interest rate might be a bit higher.
• Good: 670-739. Getting approved may depend on the loan type and amount. If approved, expect a higher interest rate than 740+ scores.
• Fair: 580-669. Getting approved might be difficult. If approved, this group gets the highest interest rates. 
• Poor: 579 and lower. Lenders do not typically approve credit scores below this number.

Figuring out your score

Don’t know your credit score? It’s easy to check and monitor it through Fifth Third Identity Alert^®. This will also help you keep tabs on any suspicious activity that may negatively impact your score.

If your credit score seems suspiciously low, there may be an error in your credit report. Credit reports contain your full borrowing history — including any personal loans or student loans, plus all credit cards you’ve opened and closed. Every time you make a payment on any loan, that information is reported to the credit bureaus.

There are three major credit bureaus (TransUnion, Experian and Equifax), and each holds their version of your credit report. By law, every 12 months you’re entitled to one free copy of your credit report from each bureau. Go to AnnualCreditReport.com to request yours. If you find any errors on your reports, you can submit a correction directly to that bureau.

How to improve your score and build better credit

If you’re not satisfied with your score, don’t worry. You can raise it over the long term. Raising your score is all about putting good credit-building practices into place.

• Make on-time credit card and loan payments. On-time payments determine 35% of your credit score. Making your payments on time is the best move you can make to help you qualify for future home mortgages, car loans and more. Set recurring bills on auto-payment so you don’t accidentally miss a payment.
• Pay more than the minimum balance. Your debt-to-available-credit ratio determines 30% of your credit score. This is why maxing out a credit card brings it down. If you make minimum required payments only, your debit-to-credit ratio will remain higher. The more credit you have available, the better your credit score.
• Consider keeping long-standing cards open. The card you opened in college could work in your favor. Average length of credit history determines 15% of your credit score, so it’s helpful to keep older cards open. However, it’s important to weigh the pros and cons. If you don’t trust yourself to use credit cards responsibly, your credit score might fare better in the long term if you close old cards.

Your credit score can fluctuate depending on the borrowing decisions you make, so the earlier you can wrap your head around it — and know what to do to build an enviable score — the better.

The views expressed by the authors are not necessarily those of Fifth Third Bank, National Association and are solely the opinions of the authors. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank, National Association or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank, National Association. Member FDIC.