How Your Credit Score Works
What a credit score actually is
Your credit score is a three-digit number between 300 and 850 that tells lenders how reliably you repay debt. The higher the number, the less risk a lender takes by lending to you — and the better the interest rates and terms you qualify for. A difference of 100 points on your credit score can mean tens of thousands of dollars in interest over the life of a mortgage.
The most commonly used scoring model is the FICO score. Here is how it breaks down.
The five factors that determine your score
Payment history — 35%. This is the single most important factor. Do you pay your bills on time? One missed payment can drop your score significantly. The longer your history of on-time payments, the stronger this component becomes.
Amounts owed — 30%. This measures your credit utilization — how much of your available credit you are using. If you have a $10,000 credit limit and carry a $3,000 balance, your utilization is 30%. Keeping this below 30% is the general guideline, but below 10% is ideal for the highest scores.
Length of credit history — 15%. How long have your accounts been open? Older accounts help your score. This is why closing old credit cards — even ones you do not use — can sometimes hurt your score.
Credit mix — 10%. Having a variety of credit types — credit cards, installment loans, a mortgage — shows you can manage different kinds of debt responsibly.
New credit — 10%. Every time you apply for new credit, a hard inquiry is placed on your report and your score dips slightly. Multiple applications in a short period signal financial stress to lenders.
Your credit score is not a measure of your worth. It is a measure of your borrowing behavior — and behavior can always be changed.
What counts as a good score
Scores below 580 are considered poor. 580 to 669 is fair. 670 to 739 is good. 740 to 799 is very good. 800 and above is exceptional. Most people with scores above 740 qualify for the best available interest rates on mortgages and car loans.
How to check your score for free
You are entitled to a free credit report from each of the three major bureaus — Equifax, Experian, and TransUnion — once per year at AnnualCreditReport.com. Many banks and credit card companies also now provide free credit score monitoring as a standard feature of your account.
The fastest ways to improve your score
Pay every bill on time — set up autopay for minimums if needed. Pay down credit card balances to reduce utilization. Do not close old accounts unless there is a compelling reason. Do not apply for multiple new credit accounts at once. These four actions, sustained over six to twelve months, produce meaningful score improvements for most people.