Lessons from the Pros

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A Few Facts About Credit Scores

Your credit score can mean the difference between being approved for credit and being denied. A bad credit score can also cause lending institutions to see you as a risk and cost you money in the form of higher interest rates. Knowing the top credit reporting agencies and their credit rating scale is an important step in maintaining an excellent credit score.

What's Your Credit Score?

What is a Good Credit Score?

Your credit score is based on the money you’ve borrowed, the amount you owe, and your payment history. If you’re a new borrower, maybe fresh out of school, you may have trouble establishing credit simply because you don’t have a history. Opening a few credit card accounts, using them, and paying on time is the first step in building a good credit score.

If you’re an established borrower with a poor credit history, that is probably due to missed payments or payments that are frequently late. Lenders will often give you a grace period for the first late payment, but over time delinquencies add up and lower your credit score. This will lead to trouble getting additional credit and when you do, it will be at a higher interest rate. Solution: break the procrastination habit and start paying your bills on time. It may help to consolidate your debts so you have just a few payments to keep track of each month.

If you’ve been using credit for some time, and regularly pay your bills when due, congratulations! You probably have an excellent credit score. This will help you qualify for new credit at favorable terms, and also assist in major purchases like a car loan or home mortgage. If you are one of those responsible people who pays off your entire credit card balance every month, you may have heard that can actually lower your credit score because of lack of “credit utilization”. There are conflicting reports from credit score experts on whether this is true, but even if it is true your score is probably high enough you shouldn’t worry.


In 1972, Fair Isaac developed the first automated credit processing system. Wells Fargo was the first to implement it. This development made it possible for companies to extend credit safely and efficiently to as many consumers as possible, which further helped to make the use of credit cards nearly universal. In 1979, the company developed the numerical credit scoring system–FICO–that is commonly used today. While it was not the first automated credit scoring system, it grew rapidly to become the market leader, boosted in the mid-1990s by the endorsement of FICO by Fannie Mae and Freddie Mac.

FICO Score Range

  • F:   300-499
  • D:   500-549
  • C:   550-599
  • C+: 600-649
  • B:   650-699
  • B+: 700-749
  • A:   749-799


There is also another scoring system in town. It’s called VantageScore. The nation’s three major credit reporting companies (CRC’s) – Equifax, Experian and TransUnion, all worked together in 2006 to develop a generic credit scoring model that is regularly revalidated. This is the first time the three CRC’s have worked together. Why, you might ask? Well, they pay a license fee to FICO for using their credit scoring model and I imagine that they found it was more cost effective to create their own.

Vantage score has recently come out with its new model 3.0. The range of scores now go from 300 to 850 using a numerical scale that is more commonly accepted – previously the scoring model was 501-990.

Vantage Score credit scale

Here are a few things you can do to improve your credit score:

  • Pay your bills on time
  • Apply for credit only when needed
  • Keep outstanding balances low
  • Reduce total debt
  • Build and maintain your credit history

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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