Please ensure Javascript is enabled for purposes of website accessibility

This device is too small

If you're on a Galaxy Fold, consider unfolding your phone or viewing it in full screen to best optimize your experience.

Skip to main content

The Complete Guide to Understanding Your Credit Score

Updated
Lyle Daly
By: Lyle Daly

Our Personal Finance Expert

Many or all of the products here are from our partners that compensate us. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page.

Wondering how a credit score works? We've got answers to all your questions here.

When you're new to it, your credit score may seem like a daunting subject. No one just naturally knows how credit scores work or what's considered a good score and what's considered a bad one. Those are all things you need to learn. Fortunately, it's easier to understand your credit score than you'd think.

In this credit score guide, you'll learn what a credit score is, the factors that affect yours, and much more. Keep reading and you'll soon have all the knowledge you need to understand credit scores and why they're so important.

What is a credit score?

A credit score is a number representing the likelihood that a consumer will pay their bills on time, and in particular, their debts.

It could also be described as a risk score. If you have a high credit score, then banks and lenders will see you as a low risk. That means you're more likely to get approved when opening a credit card or applying for a loan.

It's worth noting that there are many different types of credit scores out there. That's for two reasons:

  • There are several credit scoring systems. Each system produces its own unique scores.
  • There are multiple credit bureaus that calculate scores.

To put it simply, you don't just have one credit score, you have credit scores. These credit scores can vary, although they'll typically be in a similar range. You're unlikely to have excellent credit with one scoring system and poor credit with another.

How is a credit score calculated?

Credit bureaus use the information they have in their files to calculate credit scores.

There are three major credit bureaus that handle consumer credit scores: Equifax, Experian, and TransUnion. Each bureau keeps credit files on U.S. consumers. In your file, the bureau includes the financial information it has about you. If a company reports that you paid your bill on time, that will go on your file. The same is true if it reports that you're late on a payment.

To calculate your credit score, a credit bureau applies its credit scoring system to the information it has on you. It doesn't do this just once, though. It produces credit scores using multiple scoring systems. Since each system is different, your credit scores could vary depending on the one that was used.

Another reason that your credit score can vary by bureau is that the bureaus don't all get the same information. For example, one creditor could report your payments to Equifax and TransUnion, but not Experian, leading to different scores.

Credit invisible consumers

Credit bureaus can't calculate credit scores for every one. Some consumers are credit invisible. That means they don't have credit files and, consequently, they don't have credit scores. There are also consumers who have "thin" credit files, which means there's not enough information for the credit bureaus to calculate a score.

FICO® Score vs. credit score

You may have heard the terms "FICO® Score" and "credit score" and want to know if there's a difference. After all, it often seems like they're used interchangeably.

A FICO® Score is a type of credit score that's calculated using a FICO scoring system. FICO has many different scoring systems, which means that each consumer will have many different FICO® Scores. What makes FICO® Scores so well-known is that they're the most widely used by lenders.

A simple way to look at it is that every FICO® Score is a credit score, but not every credit score is a FICO® Score.

Because of the popularity of FICO® Scores, this is the one type of credit score you should pay the most attention to. If you use a credit score service that shows you a FICO® Score, you're more likely to know what companies will see when they check your credit.

What are the different credit score ranges?

Credit score ranges depend on the scoring system, but most use the following ranges: poor, fair, good, and exceptional or excellent. Here are the score ranges under FICO® Score 8, one of the most widely used systems:

FICO® Score Range
300 - 579 Poor
580 - 669 Fair
670 - 739 Good
740 - 799 Very good
800 - 850 Exceptional
Source: Experian.

Here are the score ranges under another popular system, VantageScore 3.0:

VantageScore Range
300 - 499 Very poor
500 - 600 Poor
601 - 660 Fair
661 - 780 Good
781 - 850 Excellent

What is the average credit score?

The average credit score falls into the good range with both of those scoring systems. As of 2019, the average FICO® Score was 706, and the average VantageScore was 682.

Factors that impact your credit score

The main factors in how your credit score is calculated are payment history, credit utilization ratio, age of credit history, credit mix, and new credit inquiries. Some of those aren't exactly self-explanatory, so let's go over what they all mean.

Payment history

Payment history refers to whether you pay your bills on time. It takes years to build a strong payment history, and it can take just as long to bounce back from late payments if you're rebuilding your credit. Be aware that credit bureaus can only go by the payments reported to them and as such, not every bill will make it to your credit report and affect your credit score.

Activity on credit cards and loans is usually reported to credit bureaus. With other types of bills, it's hit or miss. The good news is that credit bureaus have been coming up with ways to include more types of payments, such as rent and utilities, in consumers' credit scores.

Payment history is very important in most credit scoring systems. It makes up 35% of your FICO® Score.

Credit utilization ratio

Credit utilization ratio is how much of your available credit you use. This category focuses more on your credit card balances, and it compares all your available credit to your reported balances. If you have $1,000 in balances and $5,000 in available credit, then your credit utilization is 20%.

A low credit utilization is better for your credit score. There's no specific amount separating good and bad credit utilization. It's more of a sliding scale: 30% is better than 40%, which is better than 50%, and so on. The conventional wisdom has long been to keep your credit utilization below 30%, but it's better if you can get it even lower.

Your credit utilization accounts for 30% of your FICO® Score.

Age of credit history

Age of credit history may sound straightforward, but it's more complex than you'd think. It can include all of the following:

  • The average age of your credit accounts
  • The ages of each individual credit account
  • The age of your newest credit account
  • The length of time since using each credit account

As you'd expect, older accounts are better. The age of your credit accounts is 15% of your FICO® Score.

Credit mix

Credit mix measures the diversity of your credit accounts. It helps your score to have a variety of accounts, such as a credit card, a mortgage, and an auto loan. Lenders want to see how you manage different types of credit rather than just one.

You probably wouldn't want to borrow money just to boost your credit score, and you don't need to. Credit mix is 10% of your FICO® Score, and it's possible to get a high score even if you only have credit cards.

New credit inquiries

A new credit inquiry occurs when you apply for a credit account. The creditor will need to check your credit file, and this is called a credit inquiry. While one credit inquiry won't have much of an impact on your credit score, multiple inquiries can add up.

Like credit mix, new credit inquiries are 10% of your FICO® Score.

Why you need credit

Whether it's to borrow money, sign up for utilities or even rent an apartment, your credit score is guaranteed to come into play throughout your life. If you take the time to build your credit, it will almost certainly save you money in the future.

The most obvious example is borrowing money. One day you may need, for instance, a mortgage or an auto loan. The lender will use your credit score to decide whether to approve your application. It will also use your credit score to set the interest rate, which is the cost of borrowing the money. On a mortgage, an excellent credit score could save you over $100,000 in interest compared to a fair credit score.

A high credit score will open up far more credit card options. The bonuses on the top rewards cards can be worth hundreds of dollars. But you'll typically only qualify if you have good or excellent credit.

There are all kinds of ways credit affects your life. A good credit score can be a huge help, whereas a bad score can hold you back and cost you money. Considering it's simple enough to build your credit, you should work on it now so you can reap the benefits later.

FAQs

  • A credit score is a number representing the likelihood that a consumer will pay their bills on time, and in particular, their debts.

  • The main factors in how your credit score is calculated are payment history, credit utilization ratio, age of credit history, credit mix, and new credit inquiries.

  • A FICO® Score is a type of credit score that's calculated using a FICO scoring system. A simple way to look at it is that every FICO® Score is a credit score, but not every credit score is a FICO® Score.

  • There are all kinds of ways credit affects your life. The most obvious example is borrowing money. One day you may need, for instance, a mortgage or an auto loan. The lender will use your credit score to decide whether to approve your application.

Our Personal Finance Expert