Credit Score: Understand and Improve Your Credit Scores
The three-digit credit score impacts many aspects of the financial life of every American. Your credit score will affect your ability to get a credit card, a mortgage, or a car loan. But the credit score affects more than just access to credit - it also represents how likely people are to pay their bills and may affect other aspects of life.
Landlords, insurance companies, and employers may check credit reports and credit scores. Besides preventing you from accessing some financial products, a low credit score may affect your insurance premiums and decrease your chances of getting an apartment or a job. A low credit score can have severe financial consequences and make life more expensive.
Life can become financially more difficult as your credit score decreases. Understanding your credit scores is a crucial step in improving your credit and not letting your score go down.

What Is a Credit Score?
A credit score refers to a number between 300 and 850. This number represents your financial stability and creditworthiness, or in other words, how likely you are to pay back what you owe. The higher the number, the better your creditworthiness and the more you are welcomed as a customer.
What Is a Good Credit Score?
Credit scores in the 500s are considered to be very poor. Scores in the 600s are getting close to average and considered fair or subprime. The national average is between 700 and 720. A good credit score starts into the 700s. Anything above 800 is considered exceptional.
Credit Score Range | VantageScore 3.0 | FICO |
---|---|---|
Excellent | 781 - 850 | 800 - 850 |
Very good | N/A | 740 - 799 |
Good | 661 - 780 | 670 - 739 |
Fair | 601 - 660 | 580 - 669 |
Poor | 500 - 600 | < 580 |
Very poor | < 500 |
How Credit Scores Are Calculated?
There are several scoring models provided by different companies. Each company calculates your score a bit differently. But all of them base your scores on your credit reports with your payment history, credit usage, and length of credit history. Today most lenders and organizations use scoring models calculated by Fair Isaac Corp (FICO) and VantageScore.
What is a Credit Report?
Credit card companies, lenders, and other financial institutions report your borrowing and repayment activities to credit bureaus, which are companies that collect and maintain credit data on consumers. Credit bureaus use this information to generate credit reports, which are detailed records of your credit history.
Difference Between Credit Score and Credit Report
Credit scores and credit reports are two different things. A credit report is a statement with information about your credit situation that includes a list of your credit accounts, credit usage, payment history, credit inquiries, and public records such as bankruptcies and liens. Credit scores are calculated based on the information from credit reports. The credit report is like the test you took, and the credit score is the grade you got on the test.
Factors That Affect Your Credit Scores
Your credit scores are calculated based on various factors that reflect your creditworthiness. Keep in mind that these percentages are estimates, and the exact weighting of each factor can vary depending on the specific scoring model. These factors include:
1. Payment history: Your payment history is a major factor in your credit scores, and it accounts for about 35% of your credit score. This includes whether you have made all of your credit payments on time and whether you have any late payments or collections on your credit report.
2. Credit utilization: Credit utilization is the amount of credit you are using compared to the amount of credit available to you. This accounts for about 30% of your score and is an important factor in determining your creditworthiness. It is generally better to have a lower credit utilization (less than 30%), as it shows that you are not heavily reliant on credit and are able to manage your debts effectively.
3. Credit history length: The length of your credit history can also impact your credit scores, as a longer credit history can show that you have a track record of managing credit responsibly. This accounts for about 15% of your credit score.
4. Credit mix: The mix of credit accounts you have, such as credit cards, mortgages, and auto loans, can also affect your credit scores. This accounts for about 10% of your score. Having a diverse mix of credit types can be seen as a positive factor, while having only one type of credit may be seen as a negative factor.
5. New credit: Applying for new credit can also impact your credit scores, as it may indicate that you are seeking more credit and could be at a higher risk of default. This accounts for about 10% of your score.
What Are the Benefits of Having a Good Credit Score?
People with excellent credit scores generally get the lowest interest rates. A seemingly small difference in the interest rate can translate into a large amount of money.
The difference in cost becomes evident when you take a large loan with a long lifetime to finance a big purchase like a house or car. When you need to borrow, a low credit score means you may pay much more in interest.
For example, a 30-year fixed mortgage of $300,000 at 5% will cost a borrower a total of $750,000 over the lifetime of the loan. If that same borrower can get a loan just one percentage point lower, at a 4% interest rate, the total repayment amount will be $660,000 - a difference of $90,000.
Besides cheaper loans and access to the best credit cards, people with good credit scores generally have better access to most financial products. Because there are higher chances that high score holders will pay their bills on time, they may have an easier time renting apartments and getting better insurance discounts.
Low credit score borrowers may face more declinations and have fewer options when shopping for financial products and housing options. For businesses that want to reduce risk, it's easier to say no to applicants whose credit scores suggest that they may default on loans or struggle to pay their bills.
How to Increase or Repair Your Credit Score
There is no secret sauce to improving credit scores. Pay your bills on time and stay out of excessive credit card debt. Never miss a payment on your loans, credit cards, bills, or on anything. Ever.
Stay out of credit card debt. It doesn't mean you shouldn't use credit cards. Using credit cards responsibly helps build your credit history. But carrying a credit card balance from month to month and maxing out your credit line may be detrimental to your credit history. Don't use credit as a supplement to your income, keep up with the Joneses, or rent a high-end lifestyle to impress somebody. Be diligent when repaying your debt and paying your bills and your credit score will improve over time.
Also, check your credit reports regularly to ensure that your information is accurate and nobody is opened fraudulent accounts in your name.
Related: How to Build Your Credit From Scratch
How Do I Check My Credit Reports?
You can request a free annual credit report from the three major credit reporting agencies, Equifax, Experian, and TransUnion, through AnnualCreditReport.com. Your free annual credit report does not include your credit score - you will have to get your credit score from other sources.
How to Check Your Credit Score for Free
Some banks and credit card companies offer free credit scores to their customers. Check your banking app or talk to customer service. Some institutions provide their own versions of credit scores that may differ from those calculated with industry-standard scoring models. Confirm that your credit score was calculated by FICO or VantageScore.
Another option is Credit Karma. Credit Karma is an app that can help you track your credit score, get a free credit report, and get access to free tools to help you build your credit.