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What Is a Credit Score?

A credit score is a three-digit number ranging from 300 to 850 that represents your creditworthiness. This number is calculated using information from your credit reports maintained by the three major bureaus: Equifax, Experian, and TransUnion. Lenders use this score to determine how likely you are to repay borrowed money, which directly impacts whether you'll be approved for loans and what interest rate you'll receive.

The difference between a good and excellent credit score can mean thousands of dollars over the life of a loan. For example, on a $25,000 auto loan, the difference between a 680 and 750 credit score could cost you over $2,500 in additional interest over a 60-month term. On a mortgage, this difference becomes even more significant, potentially costing tens of thousands of dollars over 30 years.

Understanding your credit score is essential because it affects more than just loan approvals. Landlords check credit when reviewing rental applications, insurance companies may use it to set premiums, and some employers review credit reports during the hiring process. Your credit score essentially serves as your financial reputation.

FICO vs VantageScore: Two Scoring Models

Two major scoring models dominate the credit industry. FICO, created by Fair Isaac Corporation in 1989, is used by approximately 90% of top lenders when making lending decisions. VantageScore, developed jointly by the three credit bureaus in 2006, is commonly used by free credit monitoring services and credit card companies providing free scores to customers.

While both models use similar factors and produce scores in the 300-850 range, there are key differences. FICO requires at least six months of credit history and one account reported within the past six months to generate a score. VantageScore can produce a score with as little as one month of history, making it more accessible for those with limited credit.

When you check your score through free services like Credit Karma or your credit card app, you're typically seeing your VantageScore. However, when you apply for a mortgage, the lender will almost certainly pull your FICO score. This explains why the score you monitor might differ from what lenders see by 20-40 points.

The Five Factors That Determine Your Score

Payment History (35%): This is the most influential factor. Lenders want to know if you pay your bills on time. Even one payment that's 30 days late can drop your score by 60-110 points, and that late payment stays on your credit report for seven years. Bankruptcies can remain for up to ten years. The best way to protect this factor is to set up autopay for at least the minimum payment on all accounts.

Credit Utilization (30%): This measures how much of your available credit you're using. If you have a credit card with a $10,000 limit and a $3,000 balance, your utilization is 30%. Experts recommend keeping utilization below 30%, but those with the highest scores typically keep it under 10%. Unlike payment history, this factor can change quickly—paying down balances can improve your score within a month.

Length of Credit History (15%): This considers the age of your oldest account, newest account, and the average age of all accounts. A longer credit history generally helps your score because it provides more data about your borrowing behavior. This is why financial experts recommend keeping old credit cards open even if you don't use them frequently.

Credit Mix (10%): Having a variety of credit types—credit cards, auto loans, mortgages, student loans—can benefit your score. This shows lenders you can manage different types of debt responsibly. However, you should never take on debt you don't need just to improve this factor.

New Credit Inquiries (10%): Each time you apply for credit and a lender pulls your report, it creates a "hard inquiry" that can lower your score by 5-10 points. Multiple inquiries in a short period can signal financial distress to lenders. However, when rate shopping for a mortgage or auto loan, multiple inquiries within a 14-45 day window typically count as a single inquiry.

Credit Score Ranges and What They Mean

Exceptional (800-850): Only about 21% of consumers have scores in this elite range. You'll qualify for the best rates available, and lenders will compete for your business. Maintaining this score requires consistent on-time payments and low utilization over many years.

Very Good (740-799): About 25% of consumers fall here. You'll qualify for better-than-average rates on most loan products. This is an excellent position to be in, and you're just a few points away from exceptional status.

Good (670-739): This is the median range for U.S. consumers, with about 21% of people scoring here. You'll qualify for most loans but might not receive the best rates. Improving from good to very good can save significant money on interest.

Fair (580-669): Considered subprime by most lenders. About 17% of consumers have fair credit. You may be approved for loans but will face higher interest rates and may need to make larger down payments. Many prime credit cards will not be available to you.

Poor (300-579): Considered deep subprime. About 16% of consumers have poor credit. Many lenders will deny applications outright. If approved, expect very high interest rates. Secured credit cards and credit-builder loans may be your best options for rebuilding.

How to Improve Your Credit Score

Pay every bill on time: Set up autopay or calendar reminders for all accounts. Even if you can only make the minimum payment, on-time payments are crucial. If you've missed payments in the past, getting current and staying current will gradually improve your score.

Lower your credit utilization: Pay down credit card balances to below 30% of your limits, ideally under 10%. You can also request credit limit increases or make multiple payments throughout the month to keep reported balances low. Some people pay their balance before the statement closing date to ensure low utilization is reported.

Check your credit reports for errors: Studies show approximately one in five consumers have errors on their credit reports. Review your reports from all three bureaus at AnnualCreditReport.com and dispute any inaccuracies. Removing incorrect negative items can provide an immediate score boost.

Keep old accounts open: Closing credit cards can hurt your score by increasing utilization and reducing your credit history length. If an old card has an annual fee, consider asking the issuer to downgrade it to a no-fee card instead of closing it entirely.

Become an authorized user: If a family member has a credit card with a long history of on-time payments and low utilization, being added as an authorized user can help your score. The account's history will appear on your credit report, though the benefit varies by scoring model.

Common Credit Myths Debunked

Myth: Checking your own credit hurts your score. Truth: When you check your own credit, it's a "soft inquiry" that doesn't affect your score. Check as often as you like to monitor your progress and catch errors early.

Myth: You need to carry a balance to build credit. Truth: You don't need to pay interest to build credit. Using your credit card and paying the full balance each month is actually the best approach—you build credit while avoiding interest charges.

Myth: Closing credit cards improves your score. Truth: Closing cards can actually hurt your score by reducing available credit (increasing utilization) and lowering your average account age.

Myth: Income affects your credit score. Truth: Your income is not a factor in credit score calculations. However, lenders may consider income separately when deciding whether to approve your application.