Understanding How Your Credit Score Works and How It Changes

Many people just know that a  credit score is just a number, but they really do not know what that number really means. Credit scores play a crucial role in a consumer’s financial health. Many financial institutions use these credit scores generated by credit scoring companies like VantageScore along with other major and minor financial information to make a decision on whether to deny or approve a consumer for a loan and what terms to give. 

A consumer with a higher credit score means that they are creditworthy and thus this increases their chances for approval of a new loan, among other perks such as higher credit amount or even a lower interest rate. 

In order to understand the factors that affect your credit score, it is important to first understand how the credit score works. In this article, we focus on VantageScore as well as walk you through some specific actions that could lead to significant changes in your score. 

How Credit Scores Work

Credit scores will significantly affect your financial health. They influence the lender’s decision to offer you loans and other credit facilities. For people who have a credit score of 640 and below, this category is considered subprime borrowers and usually, lenders are often strict to these people as they offer higher rates for their credit services than a conventional mortgage. The reason for this is that they want to compensate themselves for carrying more risk, others need to shorten the repayment period thus avoiding carrying the risk for far too long. 

People usually having a credit score higher than 700, are considered to fall under the ‘good’ category and people in this category will qualify for better loan rates, thus, they end up paying less in interest over the loan period. 

A score that is greater than 800 is considered excellent. But, one thing you need to understand is that every creditor defines their rules in regards to the range of the credit scores. For VantageScore, the ranges are as follows; 

VantageScore Credit Scoring Rating

Rating  Range Percentage of People
Excellent 750-850 16.7%
Good 700-749 34.1%
Fair  650-699 18.3%


Poor 550-649 12.6%
Very Poor 300-549 16.7%

FICO Score Credit Score Rating

Rating  Range Percentage of People
Exceptional 800-850 19.9%
Very Good 740-799 18.2%
Good 670-739 21.5%
Fair 580-669 20.2%
Poor 300-579 17%

How Is Your Credit Score Calculated? 

In the United States, there are three major credit unions namely; Experian, Equifax, and Transunion, and these bureaus report, update and store consumer’s information and histories. While the way each company reports is different from the other, there are 5 main categories that have to be evaluated when calculating the consumer’s credit score. These categories are; 

  1. Payment history. 
  2. Your total debt. 
  3. Length of the credit history. 
  4. Types of credit taken. 
  5. New credit. 

If you want to understand how your credit works, you will need to familiarize yourself with these categories. 

Your payment history counts for 35% of the credit scores and it shows your ability to pay your debts on time. The total debt owed accounts for 30% of your credit scores and takes into account the percentage of credit that is available to a person and that is currently utilized. The length of your credit history accounts for 15%, and here, the longer the credit history, the less risky you are considered to be. 

The type of credit taken accounts for 10% of your credit score and usually shows if a person has a mix of installment credit for example a car loan, or credit cards. Lastly, new credit also accounts for 10% and usually takes into consideration how many new accounts a person has, how many new accounts they have applied recently, and the timeframe of operation of the most recent account. These five categories determine how your credit score changes over time. 

Improving your Credit Score

Based on every new information being reported by the credit unions, your scores will rise or fall accordingly. If you want to take control of your financial health, you need to be conscious of the things that you may be doing now that could impact your credit. As such, here are some nuggets to help you improve your credit score;

Make sure you pay your bills on time: you want to see changes in your credit score faster? Make sure that you have at least 6 months of consistent on-time payments. 

Don’t close credit card accounts: if you have a credit card that you are not using, rather than closing its account, it is best that you just stop using it. This however will depend on the age and the credit card limit and shutting the account down might negatively impact your credit score. 

Work with professionals to repair your credit: suppose you do not have the time yourself to improve or fix your credit score, you can work with credit repair companies who will negotiate with your creditors and the three agencies on your behalf. 

Bottom line 

Your credit score is just a number, a number that could save you or cost you a lot of money in your lifetime. An excellent score will land you lower interest rates, meaning that you will pay less over the life of the loan. It is up to you to make sure that you improve your credit score and make sure that it remains as strong as possible.