Credit card issuers make fast decisions, bolstered by credit scores that boil down the last decade of your financial history into a three-digit number. A difference of a few points can upgrade your credit card rewards program or eliminate a balance transfer fee. However, few of us take the time to understand where our credit scores come from and how they affect our selection of credit card offers.
Who determines your credit scores?
Until recently, only FICO issued authentic credit scores. When you apply for a loan or a line of credit, your potential lender collects information on your credit history from one or more of the three major credit-reporting agencies (TransUnion, Experian and Equifax) and plugs it into FICO's proprietary algorithms, or a variation sponsored by the lender's preferred credit bureau.
The FICO system weights your credit history based on the information available, usually just the sources to which a particular bank subscribes. Because banks may subscribe to as many as four different credit-scoring systems, credit report accuracy across multiple bureaus has become essential for effective personal finance management.
How is your FICO score calculated?
According to FICO, five elements make up your credit score:
- Payment history (35%)
- Your credit utilization, or how much of your credit you're actually using (30%)
- Length of your credit history (15%)
- Recently issued credit (10%)
- Types of credit used (10%)
Experian launched its VantageScore algorithm as an alternative to FICO, with a few tweaks to the traditional model that emphasize available credit and your overall debt load. TransUnion and Equifax use their own versions of credit scoring, and all three credit bureaus assign "letter grades" to consumer credit profiles. (Know your score? Take this quiz to get an estimate.)
How do banks rank credit scores?
Finding the best credit card often means having to know where your credit scores fall on the spectrum of typical consumers. Over the past few years, lenders have ratcheted expectations skyward. Before the financial crisis of 2008, many banks considered a 680 FICO score "good." Today, it's just "fair." Research from FICO, Experian and Informa Research reveals how banks look at credit scores today:
- Excellent: 760-850 on FICO, 900-990 on VantageScore or an "A" letter grade.
- Good: 700-759 on FICO, 800-899 on VantageScore or a "B" letter grade.
- Fair: 620-699 on FICO, 700-799 on VantageScore or a "C" letter grade.
- Poor: Below 620 on FICO, below 700 on VantageScore or a "D" or "F" letter grade.
You may also have heard a bank representative or a mortgage broker note that you've got a "thin credit file." That just means your limited credit history makes it hard for a credit card issuer to figure out whether you're a good risk. Building a track record with a student credit card or secured credit card usually improves your score over time.
Best-rated cards for each credit score range
The best-rated credit cards in each category reveal how lenders view each group of consumers. As risk increases, so do finance charges and fees. Bank managers often rely on the aspirational nature of credit card brands, hoping that you'll settle for a deal in the category just below your current score range. To help you get started, here are eight popular credit cards (two in each category) that have a reputation for fairness based on acceptance, finance charges and rewards. (Find a better credit card.)
Excellent credit
The best credit card companies save their most impressive offers for consumers with high FICO scores. Banks assume you'll pay your bills on time, rarely run through more than half of your available credit and rack up lots of big-ticket purchases that earn them some tidy fees from merchants.
- Capital One VentureOne Rewards Credit Card. This souped-up version of the popular Venture card carries no annual fee and a crazy balance transfer offer with no transfer fee.
- Chase Freedom Visa. Its television ads only slightly exaggerate reality: Chase practically falls over itself trying to give free money to cardholders with excellent credit. This all-purpose card boasts a strong balance transfer offer, plus special cash bonuses and rebate opportunities throughout your first year. If you travel frequently, you might get even more value from a Chase Sapphire Card.
The best credit card offers for excellent credit change often, especially when banks try to poach each other's high-value clients at the end of each quarter.
