Your credit score is a numerical representation of your financial health and plays a crucial role in various aspects of your life. A good credit score can open doors to financial opportunities, while a poor credit score can present challenges. This article will provide you with an overview of credit scores, how they are calculated, how to check them, and how to improve them. By understanding the factors that influence your credit score, you can take proactive steps to enhance your financial well-being.

What Is a Credit Score?

A credit score is a number between 300 and 850 that reflects your credit history and financial behavior. The number is calculated by credit reporting companies like Equifax, TransUnion, and Experian, using data from various sources including lenders, credit card issuers, public records, collection agencies, and utility companies. 

FICO and VantageScore are two of the most widely used credit scoring models in the United States. These models were launched in 1989 and 2006, respectively, and have undergone continuous updates to remain accurate and relevant. Both FICO and VantageScore are known for their predictive accuracy and comprehensive approach to assessing creditworthiness.

Sometimes, differences in credit scores can occur between credit apps and lenders; an app may show credit as "very good" while a lender rates it as "good." These differences can occur for several reasons: 

  • Credit score apps often use the VantageScore model, while many lenders rely on FICO scores. These models weigh various credit factors differently, which can result in score variations. Additionally, lenders may use older FICO models, which may calculate your score differently than the newer FICO models used by many apps.
  • The timing of credit report updates can influence the score you see on your app. A lender might pull your report after a recent credit change, such as opening a new credit card or loan, which hasn't yet been reflected in the score provided by your app.
  • Lenders sometimes combine scores from the three major bureaus (Equifax, Experian, TransUnion) and select the middle score. A consumer app might only pull from one bureau, leading to further differences.

To get a more accurate understanding of your creditworthiness for specific financial products, it's recommended to check with the lender directly. They can provide you with the exact credit score they used to assess your eligibility and offer advice based on their specific criteria.

While specific ranges may vary slightly between scoring models, a higher credit score generally indicates better financial stability.

  • 300-579: Poor credit
  • 580-669: Fair credit
  • 670-739: Good credit
  • 740-799: Very good credit
  • 800-850: Excellent credit

Why Is a Credit Score Important?

A credit score is a financial snapshot that assesses your lending trustworthiness. It directly impacts your ability to borrow money, obtain favorable terms on loans, and even secure employment. Here's how your credit score can influence your financial security:

  • Borrowing Decisions. Lenders use credit scores to assess your repayment reliability and determine whether to approve loan applications. A good credit score can improve your chances of securing loans with favorable interest rates and terms.
  • Interest Rates. Individuals with higher credit scores typically qualify for lower interest rates on loans, such as mortgages, auto loans, and credit cards. This can result in significant savings over time.
  • Financial Opportunities. A good credit score can open doors to financial opportunities, such as rental apartments, job offers, and insurance policies with favorable terms.
  • Non-Financial Impacts. In some cases, a good credit score may be considered during employment background checks or for certain professional licenses. 

What’s the Difference Between a Credit Report and a Credit Score?

A credit report is a detailed summary of your credit history, including your past and present credit accounts and payment history. It provides a comprehensive view of your financial behavior. Your credit score, on the other hand, is a numerical representation of your creditworthiness, calculated using the information in your credit report. 

Regularly checking your credit report from all three major credit bureaus (TransUnion, Equifax, and Experian) is essential for maintaining a healthy credit score. By monitoring your credit report, you can identify errors, detect fraud, track your credit utilization, and make informed decisions about your financial future. Different lenders may report your credit information to only one or two of the credit bureaus, so reviewing all three at least once per year provides a comprehensive view of your credit history.

The Five Key Factors That Influence Your Credit Score

These are the five factors that lenders look at to determine your financial reliability. They each account for a percentage of your credit score. 

1 | Payment History

Payment history is the most significant factor influencing your credit score, accounting for approximately 35% of the total. Consistently making on-time payments on your credit obligations demonstrates responsible financial behavior and positively impacts your credit score.

Conversely, late or missed payments can have a negative effect on your credit score. Even a single late payment can negatively impact your credit standing. The impact of a late payment can vary depending on factors such as how late the payment was, the amount owed, your overall payment history, and the type of credit account.

2 | Amounts Owed and Credit Utilization

Amounts owed and credit utilization comprise 30% of your credit score. This refers to the amount of debt you carry across all credit accounts and how much of your available credit you're using.

Lenders view high credit utilization as a risk, indicating that you may be struggling to manage your finances. It's generally recommended to keep your credit utilization below 30%. For example, if your combined credit limit is $10,000, aim to carry a balance of no more than $3,000 in a given month. The lower your credit utilization, the better your credit score will be.

3 | Length of Credit History

Length of credit history accounts for 15% of your credit score. Lenders consider factors such as the age of your oldest credit account, your newest account, and the average age of all your other accounts.

A longer credit history demonstrates your ability to manage credit over time. Having an older credit account can positively impact your credit score, as it shows a history of consistent financial behavior. But, it's important to note that having a mix of both older and newer accounts can also be beneficial. This indicates that you've been actively managing credit throughout your financial history.

4 | Credit Mix

Credit mix makes up 10% of your score and refers to the variety of credit accounts you have. Having a mix of different credit types, such as credit cards (revolving credit), and personal loans, or mortgages (installment credit), demonstrates your ability to manage different types of  borrowing. Revolving credit accounts have no set repayment term and allow you to borrow and repay funds over time. Installment loans, on the other hand, have a fixed loan amount, interest rate, and repayment term. A diverse credit mix can positively impact your credit score. However, it's important to note that having a mix of credit accounts is not as important as maintaining a positive payment history and low credit utilization.

5 | New Credit Inquiries

New credit inquiries account for 10% of your credit score. Opening multiple new lines of credit within a short period can negatively impact your credit score. Lenders may view this as a sign of financial instability, potentially increasing their risk assessment.

Additionally, each time you apply for a new credit account, the lender pulls your credit report. This inquiry can temporarily lower your credit score, as it indicates increased credit activity. While a single inquiry may have a minimal impact, multiple inquiries within a short period can be more significant.

How To Check Your Credit Score

There are several ways to check your credit score. 

  • Financial Institution. Many banks and credit unions offer free credit score access to their customers as part of their services.
  • Online Credit Reporting Agencies. You can obtain your credit score and report from each of the three major credit bureaus, Equifax, Experian, and TransUnion. They offer free annual credit reports through AnnualCreditReport.com.
  • Credit Monitoring Services. Some companies provide credit monitoring services that allow you to track your credit score over time and receive alerts for changes or potential issues.

It's important to understand the difference between soft and hard inquiries:

  • Soft Inquiries. These are credit checks conducted for informational purposes, such as when you check your own credit score. They have a minimal impact on your credit score.
  • Hard Inquiries. These occur when a lender pulls your credit report to assess your creditworthiness for a new application. Multiple hard inquiries within a short period can slightly lower your credit score.

You can check your credit score as often as you like without negatively affecting it. 

How To Boost Your Credit Score

There are several ways you can improve your credit score, whether you're building credit from scratch or rebuilding after some credit missteps. 

  • Pay bills on time. Consistently pay your bills on time to demonstrate responsible financial behavior. Consider setting up automatic payments or reminders to help you stay on track and avoid late payments.
  • Keep balances low on credit cards. Maintain a low credit utilization ratio by keeping your balances below 30% of your credit limits.
  • Avoid excess credit inquiries. Limit the number of new credit applications within a short period to minimize the negative impact on your credit score.
  • Diversify your credit. Establish a mix of credit accounts, such as credit cards, personal loans, and mortgages, to show your ability to manage different types of credit.
  • Monitor your credit report for inaccuracies. Regularly review your credit report for errors and inaccuracies. Dispute any incorrect information to protect your credit score.

By consistently practicing these strategies, you can raise your credit score and unlock financial opportunities.

Common Myths About Credit Scores

Many misconceptions exist about credit scores. Here are some common myths and the truth behind them:

  • Checking your credit score lowers it. Checking your credit score through authorized channels, such as a credit reporting agency, does not negatively impact your score.
  • Closing unused accounts improves your score. While closing unused accounts may not directly harm your score, it can shorten your credit history, which is a determining factor. If you have a long-standing credit history with an account, consider keeping it open and using it occasionally to maintain a diverse credit mix.
  • Only late payments affect your score. While late payments are a significant factor, other elements, such as credit utilization and credit mix, also contribute to your credit score.
  • Never using your credit card can help your score. Having no credit activity on your credit card can raise concerns about your creditworthiness. It's recommended to use your credit cards occasionally and pay off the balances in full to demonstrate responsible credit management.

Understanding these myths can help you avoid common mistakes and take informed steps to improve your credit.

Understanding your credit score is essential for managing your financial health. Remember to check your credit report regularly, pay bills on time, keep your credit utilization low, and diversify your credit mix. By following these tips, you can enhance your credit score and improve your financial future.