What is a credit score and why does it matter?

Qualifying for credit cards, mortgages, personal loans, and other financial products is dependent on your credit score.

In the 1980s, Fair Isaac Corporation (now FICO) recognized the need for a straightforward method to analyze consumers' credit reports. As a result, it developed the FICO score, a three-digit number that evaluates creditworthiness based on data from the three major credit-reporting agencies, TransUnion, Experian, and Equifax.

While FICO is the widely used credit scoring model in the U.S., there are other credit scoring models available. Additionally, there are different FICO scores depending on the type of loan being applied for, such as an auto loan or a credit card.

FICO scores are determined by specific factors, and there are ways to improve yours.

What we’ll cover

What is a FICO score?

Your ability to repay debt is assessed by lenders using a FICO score, with higher scores indicating lower risk and increased chances of approval for a line of credit. FICO scores range from 300 to 850, but there are industry-specific scores that can range from 250 to 900. All FICO scores are based on your credit history, including payment history, credit length, and credit utilization.

Your FICO score can vary depending on which credit reporting agency a lender is using, as each agency has slightly different information in its files.

Types of FICO scores

Numerous FICO scores exist, with credit card companies, mortgage lenders, and auto loan providers each utilizing slightly different factors in evaluating credit history. While FICO Score 8 is the most widely used, it is not intended for a specific type of credit. Here are some common FICO score versions and their respective uses:

FICO Scores: 3, 9; FICO Bankcard Scores: 2, 4, 5, 8, 9
FICO Auto Scores: 2, 4, 5, 8, and 9 for auto lenders.
Mortgage lenders: FICO Scores 2, 4 and 5
FICO Score 10, FICO Score 10 T, FICO Auto Score 10, FICO Bankcard Score 10.

How is my FICO 8 score calculated?

Your FICO 8 score is a numerical value ranging from 300 to 850, based on five crucial factors.

Whether you have a good payment history (35%).
Your credit utilization rate, which represents the percentage of credit you're using compared to your total credit limit, is referred to as amounts owed (30%).
The duration of your credit history (15%): The length of time you've been utilizing credit.
How frequently have you opened and applied for new accounts?
Your credit portfolio comprises a range of credit options, such as credit cards, installment loans, and mortgages.

What is a good FICO score?

FICO scores can be broken up into five ranges.

Poor: 300 to 579
Fair: 580 to 669
Good: 670 to 739
Very good: 740 to 799
Exceptional: 800 to 850

Whether you'll be approved for various financial products, such as credit cards, is largely dependent on your credit score.

The Capital One QuicksilverOne Cash Rewards Credit Card is designed for individuals with fair credit, making it accessible to those with a FICO score of at least 580 to 669. Although there is a $39 annual fee (refer to rates and fees), members receive 1.5% cash back on all purchases and up to 6 months of complimentary Uber One membership statement credits.

To qualify for the Discover it® Balance Transfer, one of CNBC Select's top picks for balance transfer cards, you need a score of at least 670. Members receive a 0% intro APR on balance transfers for 18 months and on purchases for six months. After that, the variable APR ranges from 17.24% to 28.24%. There's a 3% intro balance transfer fee, up to 5% on future transfers. Additionally, you get 5% cash back on up to $1,500 in purchases in rotating quarterly categories after activation (then 1%), and 1% back on all other purchases. Discover will also match all cash back earned at the end of the first 12 months.

How to improve your credit score

Increasing your credit score can lower your mortgage rate, make it easier to rent an apartment, and get you approved for a credit card with competitive rewards. Here are some ways to improve your score.

Make on-time payments

Maintaining a good payment history is crucial for a high FICO score, so it's important to stay organized and set reminders or use autopay to avoid missing payments.

Get credit for utility bills

Experian Boost™ is a complimentary service that updates your Experian credit report with timely payments to your cell phone, electricity, and other utility companies that are not typically associated with credit reporting agencies.

On average, users who experience an improvement in their FICO scores see a 13-point increase, as stated by the company.

Request a credit limit increase

By increasing your available credit without incurring additional debt, you can decrease your credit utilization ratio.

Avoid opening too many new accounts

If you're approved for each application, it will lower the average age of your accounts.

Request a copy of your credit report

You have the right to request a copy of your credit report from the agency that issued it if you've been denied credit. However, Experian IdentityWork℠ Premium offers a more comprehensive service by reviewing data from all three credit bureaus and informing users about score changes, new inquiries and accounts, changes to personal information, and suspicious activity. Additionally, it provides regular updates on your basic FICO score.

For $29.95 a month, the advanced version of MyFICO® offers multiple FICO scores, $1 million in identity theft insurance, and 24-hour expert assistance in case of identity breaches.

FICO vs. other credit scores

While FICO is the widely used credit scoring model, some lenders, particularly credit card companies, utilize VantageScore as an alternative.

While both FICO and VantageScore use the same score range of 300 to 850 and prioritize payment history, they differ in how they assess and rank other factors, such as the length of your credit history.

How to get a copy of your FICO score for free

Several major credit card companies offer a complimentary credit score to their customers, including American Express, Bank of America, Citi, Discover, and Wells Fargo.

FICO scores are used by lenders to assess creditworthiness.

Bottom line

A high FICO credit score can unlock various financial products. Ensure the accuracy of the information sent to credit reporting agencies before applying for a loan or credit card.

Why trust CNBC Select?

Our goal at CNBC Select is to deliver top-notch service journalism and in-depth consumer advice to our readers, enabling them to make well-informed decisions when it comes to their finances. Each of our personal finance articles is the result of thorough reporting by our team of expert writers and editors, who possess extensive knowledge of financial products. At CNBC Select, we are committed to maintaining our journalistic standards and ethics, even when it comes to earning commissions from our affiliate partners on many offers and links.

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Not all lenders use Experian credit files or scores, and some may not see improved scores or approval odds.

For rates and fees of the Discover it® Balance Transfer, click here.