Key takeaways

  • FICO and VantageScore credit scores span from 300 to 850.
  • The higher your score, the more likely you are to secure loans, credit cards and financing options with better terms and lower interest rates.
  • Different factors are determined to calculate your credit score, including your payment history, amounts owed, length of credit history, new credit you have and your mix of credit.
  • You can raise your credit score by following best practices, including paying your bills punctually and decreasing outstanding debts.

This piece was last updated on Oct. 25, 2023, to reflect current credit card details

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’ve probably heard 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. 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. Here, we’ll cover 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’ll 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 processes and the information they have in their reports.

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

“A credit score is a tool used by lenders to evaluate the information in your credit report to predict the risk that you will or will not repay a debt as agreed,” Rod Griffin, senior director of Consumer Education and Advocacy for Experian in Dallas, explains. “Credit scores represent the information found in your credit report at the moment it is requested, but the score is not actually part of or found within your credit report.”

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)

Your credit utilization ratio is another important factor the credit bureaus consider.

“Credit utilization is the amount of credit you are currently using compared to what is available to you. Generally speaking, the lower your credit utilization ratio, the better. This can typically be the area where people can make the biggest impact in changing their credit scores quickly,” says Kendall Meade, a certified financial planner with SoFi in Charleston, South Carolina.

Consider that borrowers with a lot of debt may be overextended, which could indicate a higher level of risk. Conversely, carrying a low amount of debt in relation to your earnings often lets creditors know you are at a lower risk of default.

Carrying debt is becoming increasingly common. According to our recent Credit Card Debt Survey, 19 percent of people have carried a balance on their credit card(s) for 5 years or more, while 35 percent of people have at least one credit card that carries a balance from month to month.

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.

“Think of credit history length like a trusty old watch – the longer it ticks, the more reliable it seems,” says Andrew Gosselin, a certified public accountant.

New credit (10 percent)

The credit bureaus also look at how much new credit you have in terms of the number of accounts you’ve opened 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 your credit mix — or the mix of different types of credit you have — including 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?

Your credit score is determined and calculated by the three different credit bureaus. This trio meticulously examines your credit report, closely looking at your financial history and factoring in the five criteria mentioned above.

“Equifax, TransUnion and Experian each calculate scores for you when requested by lenders or consumers, and your credit scores can fluctuate daily based on your credit activity,” notes Andrew Lokenauth, founder of Be Fluent in Finance.

“To generate a FICO score, you need to have at least one credit account that is six months old and have activity on at least one credit account in the past six months. You can also get a VantageScore score as long as you have at least one credit account open,” adds Griffin.

With all of that being said, it’s important to point out that your credit score can be different among the three 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 three 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?

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 suggests to lenders that you have made credit mistakes in the past and that extending credit to you could be risky.

“VantageScore credit scores have slight differences in each tier. Their excellent score falls between 781 to 850, followed by a good score between 661 and 780. A fair score is between 601 and 660, a poor score is between 500 and 600 and a very poor score is between 300 and 499,” says Griffin.

The most recent national average credit score stands at 716, though averages vary widely by state. Minnesota, for example, leads the nation, boasting an average of 742, while Mississippi trails all other states with its 680 average score.

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, 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, make sure you never pay bills late. Set your payments up on autopay if you can, or turn on 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 odds of boosting your score. On a very basic level, this means carrying a balance of no more than $3,000 for every $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 mentioned already, it’s a good idea to regularly monitor your credit reports for accuracy. If you do encounter errors on your credit reports, take the time to dispute 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

There are certainly outside factors that can make building good credit a challenge. According to our 2023 Annual Emergency Fund report, 25 percent of people say they would deal with a major unexpected expense — such as an emergency room visit or major car repair — by financing with a credit card and paying off over time.

That said, you 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.

“Long-term and consistent positive financial habits are the best way to ensure a good credit score,” adds Griffin.