Credit Score

Your credit score is a number that gives a basic grade on your credit history. Any time you apply for a loan of any type, your credit score will be essential to whether or not you're approved and what the terms of the loan will be, so it's important to know your credit score prior to applying for credit.

What Is a Credit Score?

A credit score is the three-digit number between 300 and 850 that is meant to give a sense of a person’s credit history. The longer your history, and the better you’ve done paying your bills, the higher your score will be. While a credit report includes a comprehensive rundown of when you’ve borrowed money and whether or not you have any delinquent accounts or bankruptcies in your history, the credit score is just a simple number that’s meant to summarize the more complete picture painted by your credit report.

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How Is My Credit Score Calculated?

The gold standard for credit scores is the FICO Score, named for the Fair Isaac Corporation that initially came up with the system for judging people’s credit-worthiness based on their credit history. It weighs five factors to come up with a final score that reflects your entire history of borrowing money and paying bills. The categories and their weights are as follows.

Payment History — 35 percent — Your payment history is a record of whether or not you’ve paid your bills and how timely you were in doing so. Late or missed payments will weigh on your score.

Amount of Debt — 30 percent — The total amount you owe, how many accounts you have with a balance and how much of your available credit you’re using will affect this portion of your score.

Length of Credit History — 15 percent — The longer you’ve had your accounts, the stronger your credit score will be.

New Credit — 10 percent — If you’ve opened a lot of accounts recently, it will drag down your credit score in the short term.

Credit Mix — 10 percent — Your credit score will be better if you have multiple different types of loans instead of just a single type.

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What Is a Good Credit Score?

There is no universal standard for a “good” credit score. Each lender will have their own standards for who they’re prepared to approve a line of credit for and what interest rates they will charge. However, a general rule of thumb would say that anything below 640 is considered “subprime” and could make things more difficult for you as a borrower. FICO, meanwhile, defines anything over 670 as “good” or better. The national average is 695.

Why Are Credit Scores Different?

You may notice that you get different credit scores in different situations. This has to do with two factors. The first being that everyone has more than one FICO score. FICO will update its scoring models, not to mention offer different models for different types of lenders, so your score could vary based on whether you’re applying for a mortgage or a home loan.

Even when you’re getting the same model, you can also see variation depending on which of the three major credit rating agencies — Experian, Equifax or Transunion — you use. While they’re working from the same models, each agency may have slightly different information on your credit history, contributing to slight variations in the score from each of the three.

How Do I Raise My Credit Score?

A low credit score can hamper life plans by making it hard to take out a new credit card, buy a new car or even get a mortgage for your dream home. As such, it pays to start thinking about your score long before you actually need to borrow money. Check your score regularly to make sure it keeps going up, and be sure to pay all of your bills on time.

If you’re struggling to improve your score, the route to a better credit score is simple: pay down your debts. Your credit score will tend to improve as the length of your history extends, but you have to be sure you aren’t letting debts pile up or missing payments.

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About the Author

Joel Anderson is a business writer with over a decade of experience writing about the wide world of finance. Based in Los Angeles, he specializes in writing about the financial markets, stocks, macroeconomic concepts and most broad financial topics with an eye toward instructional writing for the investing outsider.

Joel Anderson holds shares in Walmart, Verizon, AT&T, the Guggenheim Solar ETF, the United States Oil ETF and the Vanguard Total Stock Market Index Fund.