What you should know about your credit rating

When a lender is deciding whether to extend credit or a loan to someone, how do they make that decision? Lenders may not want to lend money to someone who isn’t likely to pay the debt back.

That’s where credit ratings, or credit scores, come in. These can be a straightforward metric to give lenders a glimpse into your financial history and your current financial status. 

Key takeaways

• Your credit rating, or credit score, is a measurement of how likely you are to repay a debt on time.
• Credit scores are based on the information in credit reports.
• The higher your credit scores, the lower a risk you may be to a lender.
• Paying your bills on time, not overusing your credit, and having a long, positive credit history can all help improve your credit scores over time.

A credit rating or score is a number, typically ranging from 300 to 850. And that number shows lenders how good a borrower has been in the past. This allows lenders to get a general idea of whether someone has a history of being a responsible borrower and doing things like repaying debt in a timely manner. 

And typically the higher the credit scores, the better the borrower’s credit history. 

But what exactly goes into calculating a credit rating? According to the Consumer Financial Protection Bureau (CFPB), common factors may include:

• How long you’ve had credit or loan accounts
• Your bill-paying history
• How much outstanding debt you currently have
• How much available credit you’re using
• The number and type of loans or credit you have
• Whether or not you’ve declared bankruptcy, had debts go to collections or had foreclosures—and how recently it happened
• Whether you’ve applied for new credit recently

But it’s important to remember that people have more than one credit score. And how these factors affect your credit scores depends on where the information came from and what credit-scoring formula was used to calculate a particular score.

You can get a free copy of your credit report every 12 months from each of the three major credit bureaus, Equifax®, Experian® and TransUnion®. Visit AnnualCreditReport.com to learn more. 

The bureaus may also be able to provide you with credit scores based on their reports, but they may charge a fee. You could also check directly with credit-scoring companies, such as FICO® and VantageScore®.

You could also use a credit monitoring service, such as CreditWise from Capital One. CreditWise lets you monitor your credit rating by showing you your VantageScore 3.0 credit score and TransUnion credit report. Plus, it’s free and using it won’t hurt your credit rating.

What are the five levels of the credit rating scale?

Credit scores are generally divided into a credit rating scale with around five categories that may look something like this:

• Poor
• Fair
• Good
• Very Good
• Excellent

The specific number ranges for each category could vary. Credit bureaus may have different information in their credit reports. And credit-scoring companies may use different mathematical equations—or credit-scoring models—to calculate their credit ratings. 

A FICO Score is a type of credit score that was developed by what used to be known as the Fair Isaac Corporation (known today as FICO). 

VantageScore is a credit-scoring model jointly developed by the three main credit bureaus. 

FICO and VantageScore are two of the most common credit-scoring models for determining a person’s credit rating.

Credit scores are used to determine your eligibility for credit cards, auto loans, mortgages and other loans. A higher credit rating can make a lender more likely to approve your loan request and maybe even offer you a better interest rate.

But credit cards and loans aren’t the only things that can be impacted by credit scores. Credit scores can also be a factor for things like:

• Car insurance
• Home insurance
• Phone plans
• Employers during the hiring process
• Landlords vetting tenants

When it comes to credit rating scales, the bigger the number the better. In other words, the higher your credit-score number, the less of a risk you may appear to be to a lender.

But the exact number for a good credit score depends on the type of score. For example, the ranges for good credit vary between FICO Scores and VantageScores. A good FICO Score is between 670 and 739, while a good VantageScore is between 661 and 780. 

And keep in mind that you can also have “very good” or “excellent” credit ratings, which are both better than a “good” credit score.

Given how important credit scores are, you may want to better understand how to get and keep a good credit rating. Here are some tips from the CFPB:

• Pay your bills on time whenever possible.
• Consider applying for credit cards and loans only when you need them.
• Try not to max out your credit limit.
• Check your credit report regularly for mistakes.

Another big factor is time. If you’re a new borrower, your credit scores may be low just because you don’t have a long credit or payment history. But if you focus on consistently using your credit responsibly, your credit ratings may go up over time.

Think of your credit ratings as a quick guide for lenders to better understand your credit history. A high credit rating could mean that you have used credit responsibly in the past. And it can show that you’ve been working on doing things like paying your credit cards and loans on time for a while.

If you’re ready to learn more about building a good credit rating or what benefits having a good credit score can have, Capital One is here to help.