What you need to know about your credit score

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Your credit score is an important indicator of your financial health, as well as a tool you can use to live a better life. You have probably heard that you need “good credit” to take out a mortgage or borrow money to buy a car, but there are other areas of your life where good credit can help. For example, a positive credit history can be seen as a major plus by potential employers who might ask to see a modified version of your credit report, and good credit can even help you qualify for lower insurance rates.

Not everyone knows what goes into a credit score—or the steps they can take to improve their credit over time. This guide goes over the main determinants of your credit score, which factors matter the most and the steps you can take to boost your credit health over time.

What is a credit score, and how does it work?

Your credit score is a three-digital number that represents a numerical expression of your credit health. This score is designed to help lenders assess risk—specifically, the likelihood that you will become delinquent on your credit obligations in the next 24 months.

There are many different credit-scoring models out there, but the FICO credit score is the most popular and widely used. In fact, more than 90 percent of top lenders rely on the FICO score to help them determine consumer eligibility for their financial products. Another popular scoring model you may have heard of is the VantageScore, and there are several different models of VantageScores out there, too. Fairly recently, the UltraFICO scoring model was developed to help people improve their credit.

When it comes to credit scores, and specifically FICO scores, you’ll have three different ones. That’s because each of the three credit bureaus—Experian, Equifax and TransUnion—assign you a credit score based on their internal process and the information they have in their reports.

FICO scores range from 300 to 850, with higher scores being considered better and a lower risk to lenders.

Elements of a credit score

Knowing how your credit score is calculated can help you figure out how to improve your credit over time. When it comes to your FICO score, the following factors are considered by each of the credit bureaus:

Payment history (35 percent)

Your payment history is the most important factor that makes up your FICO score, and it’s easy to see why. Obviously, lenders want to know if you’ve paid your previous debts on time, as this helps them assess how much risk they’ll take by extending credit to you as a borrower.

Amounts owed (30 percent)

The amounts you owe in relation to your credit limits is another important factor the credit bureaus consider. This is based on the concept that borrowers with a lot of debt could be overextended, which could indicate a higher level of risk. On the flip side, carrying a low amount of debt in relation to your income typically lets creditors know you are at a lower risk of default.

Length of credit history (15 percent)

How long you’ve had credit also plays a role in your credit score, and a longer credit history is considered better. According to myFICO.com, the credit bureaus take the following factors into account in this category—how long your credit accounts have been established, how long specific accounts have been established and how long it has been since you used some of your accounts.

New credit (10 percent)

The credit bureaus also look at how much “new credit” you have or how many new accounts you have in the recent past. Generally speaking, opening too many new accounts in a short amount of time can make you seem like a higher credit risk.

Credit mix (10 percent)

Finally, the credit bureaus look at the mix of different types of credit you have, whether that includes revolving credit accounts, retail accounts or installment loans. Having several different types of credit accounts in good standing can work in your favor in this category.

How do you get a credit score?

The three credit bureaus look at your credit report when determining your credit score, and in the process, they consider how you rank in the five factors we highlight above.

With that being said, it’s important to point out that your credit score can be different among the three different credit bureaus. This is due to the fact that each credit bureau likely has different information about your accounts. In other words, having different credit scores isn’t necessarily a bad sign.

Expert tip: Your credit report is a file kept with each of the credit bureaus that contains information such as your credit account history, credit inquiries you have had, public records and your personal information.

What is a good credit score?

When it comes to having good credit, you should have a goal to shoot for. FICO scores range from 300 to 850 as we mentioned already, so here’s how each tier of scores compares and what they mean:

  • Exceptional credit (800+): An excellent credit score is well above average, and it tells lenders you are especially low risk as a borrower.
  • Very good (740 to 799): A very good credit score is above average, and it illustrates a low level of risk.
  • Good (670 to 739): A good credit score is at or near the U.S. average, which is why most lenders consider this score acceptable.
  • Fair (580 to 669): Fair credit scores are below average, and they show lenders you present a certain level of risk. However, you may still get approved for credit cards or loans with a fair credit score.
  • Poor (579 or below): Poor credit shows you have made credit mistakes in the past and that extending credit to you could be risky.

What affects your credit score?

By and large, how you use credit will affect your credit score. Factors like whether you pay your bills on time and how much debt you have play the biggest role in determining your credit score, yet how much new credit you have and how long you have had certain accounts can also make a substantial impact.

However, you should also know that mistakes on your credit report can impact your score—and not in a good way. Since different information is reported to your credit reports and your credit score can be different with each credit bureau, the best thing you can do is check over your credit reports for accuracy at least a few times per year. Fortunately, you can do this for free with each credit bureau—just visit AnnualCreditReport.com.

Tips for maintaining and improving your credit score

To keep your credit score in the best shape possible, you’ll want to use any credit you have responsibly and wisely. These specific tips can help:

  • Pay your bills on time. Since your payment history is the most important factor that makes up your FICO score, you’ll want to make sure you never pay bills late. Set your payments up on autopay if you have to or set up reminders that let you know when your bills are due.
  • Keep your credit utilization at 30 percent or below. Most experts suggest keeping your credit utilization at 30 percent or below for the best results in this category. On a very basic level, this means having $3,000 in debt or less for each $10,000 in available credit you have.
  • Don’t open a lot of new accounts at once. Since new credit can impact your score, try to avoid situations where you’re opening a lot of credit cards or other types of accounts at once.
  • Keep old credit accounts open. Also, keep old accounts in good standing open—even if you’re not using them. These old accounts can help add depth to the average length of your credit history.
  • Monitor your credit reports. As we mentioned already, you’ll want to monitor your credit reports for accuracy. Also, make sure you dispute inaccuracies on your credit reports if you find them.

How to check your credit score

While you can get a free copy of your credit reports from AnnualCreditReport.com, you won’t actually see your scores. Fortunately, there are plenty of ways to get a free look at your credit score.

For example, many of the top rewards credit cards offer a free FICO score on your monthly credit card statement. Capital One’s CreditWise program and Chase’s Credit Journey are also available to all consumers whether you’re a customer or not, and both let you see a version of your TransUnion credit score.

The bottom line

While there are outside factors that can make building good credit a challenge, you may have more power than you think when it comes to your credit score. Pay your bills early or on time, don’t max out your accounts and keep an eye on your credit reports for errors, and you should be on your way to better credit in no time.

Written by
Holly D. Johnson
Author, Award-Winning Writer
Holly Johnson began her career working in the funeral industry, which may make you wonder why she works in personal finance now. Yet, the funeral industry taught the author everything she needs to know about the value of one's money and time. Johnson left the mortuary business a decade ago in order to explore her passion for personal finance and travel the world, and since then, she and her husband have built a debt-free lifestyle that has them on the path to retire very wealthy in their 40s. Holly's love of budgeting also led to the creation of her debt payoff book, “Zero Down Your Debt: Reclaim Your Income and Build a Life You’ll Love."