What Is a Credit Score?
A credit score is a three-digit number (typically ranging from 300 to 850) that represents your creditworthiness. Lenders, landlords, insurance companies, and even employers use this number to assess how likely you are to repay borrowed money or fulfill financial obligations. Your credit score affects interest rates, approval odds, and even rental applications.
The Two Main Credit Scoring Models
FICO Score
Developed by the Fair Isaac Corporation, FICO scores are used by 90% of lenders. The score ranges from 300 to 850, with 670+ considered good and 800+ excellent.
VantageScore
Created by the three major credit bureaus, VantageScore also ranges from 300 to 850 but uses slightly different weighting factors than FICO.
What Makes Up Your Credit Score?
Payment History (35%)
This is the most important factor. Late payments, defaults, bankruptcies, and collections significantly damage your score. Conversely, consistently paying bills on time builds excellent credit.
Impact: Even one 30-day late payment can drop your score by 100 points.
Credit Utilization (30%)
This measures how much of your available credit you're using. It's calculated by dividing your total credit card balances by your total credit limits. Experts recommend keeping utilization below 30%, with under 10% being ideal.
Example: If you have $10,000 in total credit limits, keep balances below $3,000 (preferably under $1,000).
Length of Credit History (15%)
Longer credit history is better. This includes the age of your oldest account, newest account, and average age of all accounts. That's why financial experts advise keeping old credit cards open.
Credit Mix (10%)
Having different types of credit—credit cards, auto loans, mortgages, student loans—shows you can manage various credit types. However, don't take on debt just to improve credit mix.
New Credit (10%)
Opening multiple new accounts in a short time suggests financial distress and can lower your score. Each credit application triggers a hard inquiry, which temporarily dips your score by a few points.
Credit Score Ranges and What They Mean
- 300-579: Poor – Difficulty getting approved; very high interest rates if approved
- 580-669: Fair – May get approved but with higher interest rates
- 670-739: Good – Likely approval with competitive rates
- 740-799: Very Good – Approval likely with favorable rates
- 800-850: Exceptional – Best rates and terms available
How to Improve Your Credit Score
Always Pay on Time
Set up automatic payments for at least the minimum due. Payment history is the biggest factor, so never miss a payment.
Reduce Credit Card Balances
Pay down balances to reduce utilization. If you can't pay off balances quickly, at least pay down cards close to their limit first.
Don't Close Old Credit Cards
Even if you don't use them, old cards help your average account age and available credit. Close them only if they charge annual fees you can't justify.
Become an Authorized User
If someone with excellent credit adds you as an authorized user on their account, their positive payment history can boost your score. Ensure they have low utilization and perfect payment history.
Dispute Credit Report Errors
Check your credit reports annually at annualcreditreport.com. If you find errors, dispute them immediately. About 25% of credit reports contain errors that could lower scores.
Keep Credit Inquiries Minimal
Only apply for new credit when necessary. Multiple applications in a short period signal desperation to lenders.
Pay Down Balances Before Statement Closing
Credit card companies report your balance on the statement closing date, not the due date. Paying down balances before the statement closes can immediately improve utilization.
How Long Does It Take to Build Good Credit?
Building credit from scratch takes at least 6 months of credit history. Recovering from negative marks depends on severity:
- Late payment: 7 years on report, but impact lessens over time
- Bankruptcy: 7-10 years on report
- Collection: 7 years on report
However, positive behavior can improve your score significantly within 6-12 months.
Common Credit Score Myths
Myth: Checking Your Credit Hurts Your Score
False. Checking your own credit is a "soft inquiry" that doesn't affect your score. Only applications for new credit (hard inquiries) impact your score.
Myth: You Need to Carry a Balance to Build Credit
False. Paying your balance in full each month builds excellent credit while avoiding interest charges.
Myth: Closing Cards Improves Your Score
False. Closing cards reduces available credit, which increases utilization and can hurt your score.
Myth: Income Affects Your Credit Score
False. Credit scores don't consider income, though lenders do when evaluating applications.
Why Your Credit Score Matters
A difference of 100 points on a mortgage can mean tens of thousands of dollars in extra interest over the loan's life. Good credit opens doors to better insurance rates, rental approvals, and even job opportunities. It's worth the effort to build and maintain an excellent score.
Conclusion
Your credit score is one of the most important numbers in your financial life. By understanding what affects it and taking strategic steps to improve it, you can save thousands of dollars and access better financial opportunities. Start monitoring your credit today and implement these strategies for long-term success.