Credit card issuers make fast decisions, bolstered by credit scores that boil down the last decade of your financial history into a three-digit score. 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 impact our selection of credit card offers.
Who determines your credit score?
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 credit score calculated?
According to FICO, five elements make up your credit score:
- Payment history (35 percent)
- Your credit utilization, or how much of your credit you're actually using (30 percent)
- Length of your credit history (15 percent)
- Recently issued credit (10 percent)
- Types of credit used (10 percent)
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.
How do banks rank credit scores?
Finding the best credit card often means having to know where your credit score falls 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 600 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 or a secured credit card usually improves your score over time.
Best rated credit 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, CardRatings.com presents five popular credit cards that have a reputation for fairness based on acceptance, finance charges and rewards.
The best credit card companies save their most impressive offers for consumers with high FICO scores. Banks assume that 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.
TrueEarnings® Card from Costco and American Express. If you're already shopping at Costco, you're probably pretty sharp with your money. One of the best cash-back credit cards on the market, TrueEarnings doubles as your Costco membership card. It converts your cash back rewards on eligible purchases into vouchers redeemable at the nationwide discount warehouse club. Terms and restrictions apply.
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.
Under recently revised credit scoring algorithms, most of us fall into the "good" category. That doesn't have to mean giving up on special perks and rebates, though.
Chase Freedom®. Their television ads only slightly exaggerate reality: Chase practically falls over themselves trying to give free money to cardholders with good to excellent credit. This all-purpose card boasts a strong low introductory balance transfer offer, special cash bonus and rebate opportunities that earn you cash back up to quarterly maximums combined purchases in popular categories that change every 3 months when you activate your bonus each quarter.
Now that banks have mostly recovered from the credit crunch, expect to see offers and terms for "good" customer accounts improve.
Barclaycard® Rewards MasterCard® - Average Credit. Even with average credit, you can apply for a version of the issuer's popular rewards card that lets you earn 2 points per dollar on gas, grocery and utility purchases and one point everywhere else. No annual fee.
The best credit cards for fair credit often take into account items that don't appear on your credit report, like rent payments and some utility bills.
Geared toward young adults with thin credit files, Discover offers an attractive cash-back rewards program and no annual fee.
The best credit card issuers help customers with fair credit "graduate" to better deals as their credit scores improve.
Before the Credit CARD Act, a handful of banks earned criticism for predatory lending practices to consumers with bad credit. Some issuers offered subprime cards that promised small credit limits, then immediately charged hundreds of dollars in service charges. "Fee harvester" accounts preyed on consumers so desperate to improve their credit scores, they felt obliged to shell out significant monthly payments for credit cards they could barely use.
But that was then, and this is now. If you're looking to rebuild your credit with a low-cost card you can actually check out our list here. As with all card offers be sure you read the fine print carefully and understand all the terms and conditions and determine if the card fits your needs before you submit your application.
The best credit card to have, at any given time, is the card that gives you the most possible value for your money. Remember to balance your desire to build a strong credit score with the real costs associated with each credit card you add to your wallet. Keep your spending in check, and use online banking tools to track your purchasing and your rewards. Review your credit score regularly to make sure your plan is having the intended result.