When you apply for a credit card or loan, lenders will usually look at your credit scores – before deciding to approve you. But what is a credit score, exactly? And why does it matter so much?
Credit scores reflect how well you’ve managed debt in the past and help creditors predict whether you’ll pay back what you borrow in the future. With good credit scores, you’re more likely to get approved for the accounts you want with favorable terms. If your scores are low, you might need to make some improvements before you can qualify.
Credit score basics
A credit score is a three-digit number that represents the information in your credit report. In most cases, your credit scores will range between 300 and 850 points.
What’s a good credit score? The higher your credit scores are the better, but according to FICO, the company that developed the credit scores most commonly used today, a score of 670 or higher is “good.”
Here’s how FICO breaks down its credit score ranges:
- Poor: 579 and below
- Fair: 580-669
- Good: 670-739
- Very Good: 740-799
- Exceptional: 800+
Why is your credit score important?
Your credit scores can have a major impact on your financial life. Higher credit scores can unlock:
- More affordable terms on credit, such as lower interest rates
- Credit cards with valuable rewards
- Approval for rental housing
- Approval for a mortgage or personal loan
- Jobs that require security clearance
- Lower auto and home insurance rates
Even if the above situations don’t currently apply to you, it’s wise to start working on your credit now, since it can potentially take years to build up good scores.
How are credit scores calculated?
Credit scores are calculated by applying algorithms to the data in a credit report. Some data in your credit report has a greater impact on the score calculation.
The following five factors affect your FICO credit scores:
- Payment history (35%): Outlines payments on loans and lines of credit, including late payments that are up to seven years old.
- Amounts owed (30%): Weighs debt balances versus credit card limits or original loan amounts.
- Length of credit history (15%): Records the total length of history using credit and average age of open accounts.
- Credit mix (10%): Captures the variety of account types in use, including credit cards and loans.
- New credit (10%): Considers credit cards and loan applications made within the prior 12 months.
While information about your income and employment history can impact your ability to qualify for financing, it does not impact your credit scores.
Different types of credit scores
Many credit scoring models exist with different calculations that are used to create your score, including scores made for specific industries or types of financing. While some creditors use VantageScore models to determine if you qualify for new credit, FICO credit scores are more common. These are the FICO score types most likely to be used in various credit decisions:
| Credit Type | Commonly used score versions |
|---|---|
Car loan | FICO Auto Scores |
Credit card | FICO Bankcard Scores, FICO Score 8 |
Mortgage or home loan refinance | Base FICO scores (FICO Score 2, FICO Score 5 and FICO Score 4) |
Personal loan | FICO Score 8 |
Retail credit card | FICO Score 8 |
Student loan | FICO Score 8 |
According to FICO Senior Director Jenelle Dito, the FICO Score 8 is the most important score to monitor since it’s most widely used by lenders.
“However, if you are financing a new car, you may want to know your FICO Auto Score,” she said. “And if you’re purchasing a home or refinancing an existing mortgage, you’ll want to know the base FICO Score versions previous to FICO Score 8, as these are the scores used in the majority of mortgage-related credit evaluations.”
How to check your credit score
Many people have complimentary access to one or more of their credit scores as a benefit of being a bank or credit card customer, so checking your score can be as easy as logging into your account.
“Over 200 financial institutions give their customers free access to the FICO Scores they use to manage credit accounts,” Dito said. So her advice is to find out if your financial institution provides the resource for free.
Here are a few other places you can sign up to see your scores without paying:
- FICO Score 8: Myfico.com/free and the Experian website.
- VantageScore 3.0: Credit Karma the Equifax website.
Understanding your credit report
The information in your credit report includes:
- Payment history on debt accounts, including late payments that are up to seven years old
- Collection accounts
- Bankruptcies filed within the last seven or 10 years (depending on type)
- Applications for new credit within the last two years
Most people have credit reports from the three major credit bureaus — Experian, Equifax and TransUnion. You can pull all three of them for free at AnnualCreditReport.com.
If you’ve never had a credit account, however, there’s a possibility you don’t have credit reports. Additionally, FICO can’t generate your credit score until you have at least six months of information on your credit report.
Ways to improve your credit score
Most of the steps you can take to increase your credit scores take time and repetition, and they generally require some financial stability. But depending on your situation, there are also a few ways you can potentially make quick improvements:
- Become an authorized credit card user: Ask a friend or family member to add you as an authorized user to one or more of their credit cards that are in good standing. When they do, their account information can positively impact your credit scores.
- Request an annual credit card limit increase: If your credit scores have improved since you opened a credit card, request an annual limit increase from your credit card issuer. If you’re approved (and you don’t increase your account balance) your scores can improve in the area of “amounts owed.”
- Pay down your credit card balances: If you have extra cash available, pay down your balances to further improve your “amounts owed” category (and reduce your interest charges). Starting with the highest APR account first will save you the most on interest.
- Apply for a secured credit card: If you’re not able to qualify for a regular credit card and can’t become an authorized user, apply for a secured credit card. With secured cards, people with no credit may qualify by making a cash deposit.
- Dispute credit errors: Review your credit reports and look for errors that might be impacting your scores, such as incorrect records showing you missed payments or a debt collection account that doesn’t belong to you. Follow the instructions on the report to file a dispute and get the error removed.
How to maintain a good credit score
If you want to build and maintain good credit, you’ll need to practice healthy, ongoing financial habits. This includes:
- Never missing debt payments
- Staying current on bills so they don’t turn into debt
- Keeping debt to a minimum
- Keeping credit card accounts open after you pay off the balance
- Avoiding unnecessary applications for new credit
Frequently asked questions (FAQs)
According to FICO, a credit score is considered good if it falls between 670 and 739 points.
You can check your credit scores as often as you like since doing so doesn’t impact them at all. In fact, checking them regularly can help you catch issues and keep your credit in good order. However, most scores are updated on a monthly basis so there isn’t typically a benefit to checking them more than once a month.
Checking your credit scores and credit reports does not lower your scores.
The fastest you can expect to see your credit scores improve is roughly 30 to 45 days since that’s how often most new credit information appears on your credit reports. However, improving your credit scores by 100 points or more can take anywhere from a few months to years, depending on the overall condition of your credit profile.
