What Is a Credit Score? A Simple Guide to How It Works
Written by
Jose Vazquez
Edited by
Nupur Gambhir
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Your credit score is a three-digit number that reflects your financial reliability. Lenders use it to decide whether to approve your applications and what interest rates to offer. A strong credit score opens doors to better loan terms, lower credit card rates, and even rental approvals.
Credit Scores Explained
Your credit score shows lenders how responsible you are with borrowed money.
- Score Range: Credit scores usually fall between 300 and 850, with higher scores indicating lower risk to lenders.
- Why It Matters: Your score affects your ability to get loans, credit cards, and even rent an apartment or secure certain jobs.
How Credit Scores Work
Your credit score is calculated using information from your credit report. Different models assess your credit history to determine your score.
Credit Bureaus and Their Role
There are three major credit bureaus–Equifax, Experian, and TransUnion. Each collect and store your credit history. While they often have similar information, slight differences can lead to different credit scores.
Credit Scoring Models
- FICO Score: This is the most widely used credit scoring system among lenders.
- VantageScore: An alternative model with a similar scoring range but different calculations.
What Affects Your Credit Score?
Many factors contribute to your credit score and each has a different level of importance.
Payment History (35%)
Paying bills on time is the most important factor in your credit score. Late or missed payments can lower your score quickly.
Credit Utilization (30%)
This refers to how much of your available credit you’re using. Keeping your balances low–preferably below 30% of your credit limit–helps maintain a strong score.
Length of Credit History (15%)
The longer you’ve had credit accounts open, the better. Closing old accounts may reduce your average account age, which can negatively impact your score.
Credit Mix (10%)
Lenders like to see that you have different types of credit, such as credit cards, loans, and mortgages. Having a mix of credit accounts can slightly improve your score.
New Credit Inquiries (10%)
If you apply for multiple credit accounts in a short period, it can temporarily lower your score. Each new credit application results in a hard inquiry, which stays on your report for up to two years.
What Is a Good Credit Score?
Credit scores are divided into categories that indicate different levels of financial reliability.
- 800-850 (Excellent): Qualifies for the best loan terms and lowest interest rates.
- 740-799 (Very Good): Eligible for competitive lending rates and credit offers.
- 670-739 (Good): Approved by most lenders, though not always at the best rates.
- 580-669 (Fair): Higher interest rates and stricter loan terms may apply.
- 300-579 (Poor): Limited borrowing options; may need to build credit with secured cards or loans.
How to Improve Your Credit Score
If your score isn’t where you’d like it to be, there are steps you can take to improve it over time.
Pay Bills on Time
Late payments hurt your score. Set up reminders or automatic payments to ensure you don’t miss due dates.
Reduce Credit Card Balances
Keeping your credit utilization low is one of the fastest ways to boost your score. Try to use less than 30% of your available credit.
Limit New Credit Applications
Each application can cause a temporary drop in your score. Only apply for new credit when necessary.
Monitor Your Credit Report
Check your credit reports regularly for errors. You can access free reports at AnnualCreditReport.com and dispute any incorrect information.
By understanding how credit scores work and taking steps to improve yours, you can set yourself up for better financial opportunities in the future.
