Learn About Credit Scores and How They Work

What Is a Credit Score and Why It Matters

A credit score is a three-digit number that lenders use to understand how likely you are to repay borrowed money. The score ranges from 300 to 850, with higher numbers indicating lower risk to lenders. Your credit score acts as a financial report card that follows you throughout your adult life, affecting many important decisions about your money.

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Credit scores matter because they influence whether lenders will work with you and what interest rates they'll offer. When you apply for a mortgage, car loan, credit card, or even rent an apartment, the landlord or lender typically checks your credit score. A higher score often means you'll receive better interest rates, which can save you thousands of dollars over the life of a loan. For example, a person with a credit score of 760 might receive a mortgage interest rate of 6.5%, while someone with a score of 620 might be offered 8.5%—a difference that adds up significantly on a 30-year loan.

Beyond loans and credit cards, credit scores can affect other areas of your life. Some employers check credit scores during hiring, particularly for positions involving financial responsibility. Insurance companies may use credit information to set premiums. Utility companies sometimes require deposits based on credit history. Understanding your credit score helps you recognize why certain financial doors open or close, and it motivates you to build and maintain good credit habits.

Practical takeaway: Request your free credit report from all three credit bureaus annually at annualcreditreport.com to understand what information is being used to calculate your score.

Understanding the Five Factors That Build Your Credit Score

Your credit score isn't random—it's calculated using five specific factors that together tell lenders about your borrowing behavior. Understanding these factors helps you see where you stand and what areas need attention.

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The largest factor is your payment history, which accounts for 35% of your credit score. This factor tracks whether you've paid your bills on time. Lenders care most about recent behavior, so a late payment from last month hurts more than one from five years ago. Even one missed payment can decrease your score, though the impact lessens over time. If you've missed payments, the good news is that on-time payments going forward will gradually improve your score. Collections, charge-offs, and bankruptcies also appear in payment history and have serious impacts.

The second factor is credit utilization, representing 30% of your score. This measures how much of your available credit you're using. If you have a credit card with a $5,000 limit and a $4,500 balance, your utilization is 90%, which is considered high and can hurt your score. Most lenders prefer to see utilization below 30%. For example, using only $1,500 of that same $5,000 limit keeps utilization at 30%. You can improve this factor by paying down balances or requesting credit limit increases from your card issuer.

Length of credit history accounts for 15% of your score. This includes how long your oldest account has been open and the average age of all your accounts. Closing old credit cards can shorten your average account age and hurt this factor. Keeping accounts open, even if you don't use them frequently, helps maintain a longer credit history. Someone with accounts dating back 10 years will typically have a better score in this category than someone whose oldest account is 2 years old.

Credit mix represents 10% of your score and refers to the variety of credit types you manage. Lenders want to see that you can handle different kinds of credit responsibly. This includes revolving credit (like credit cards and lines of credit where you can borrow, repay, and borrow again) and installment credit (like car loans and mortgages where you make fixed payments). If you only have credit cards, adding an installment loan could improve your mix. However, don't take on debt you don't need just to improve this factor.

The final 10% comes from new credit inquiries and new accounts. When you apply for credit, lenders make a "hard inquiry" that appears on your report and slightly lowers your score. Opening several new accounts in a short time signals higher risk to lenders. However, multiple inquiries for the same type of credit (like car shopping) within 14-45 days typically count as one inquiry.

Practical takeaway: Make a list of your accounts showing the payment history, credit limit, and current balance for each. This visual representation shows which factors you're managing well and which need improvement.

Credit Score Ranges and What They Mean

Credit scores fall into ranges that lenders use to make quick decisions about your creditworthiness. Knowing where your score falls helps you understand what financial products may be available to you.

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Scores from 300 to 579 are considered very poor or poor credit. People in this range typically struggle to obtain traditional credit. If they do qualify for loans or credit cards, they face significantly higher interest rates and may be required to provide a security deposit. For example, a secured credit card in this range might require a $500 deposit to secure a $500 credit limit. Mortgages are extremely difficult to obtain with this score, though some government-backed loan programs may be available. The focus for someone in this range should be building a foundation of on-time payments to gradually move into higher ranges.

Scores from 580 to 669 fall into the fair credit range. With this score, you may qualify for some traditional credit products, though with higher interest rates than someone with better credit. FHA mortgages may become available with larger down payments. Credit card approval becomes more possible, though the terms won't be ideal. Lenders still view this score as moderate risk. An individual with a score of 620 and a mortgage application might be approved but with an interest rate 1-2% higher than someone with a score of 750.

Scores from 670 to 739 are considered good credit. This range opens many doors for borrowing at reasonable rates. You'll qualify for most credit cards with competitive interest rates. Mortgages are accessible with standard terms. Auto loans come with favorable rates. Lenders view this score as indicating reliable borrowing behavior. This is the minimum range where you stop facing significant penalties for credit score level, though there's still room for improvement.

Scores from 740 to 799 are very good credit. At this level, you qualify for the best rates available for most products. You have substantial negotiating power with lenders. Credit card offers include rewards programs and premium benefits. Mortgage rates are at or near the lowest available. This score demonstrates a strong track record of responsible credit management.

Scores from 800 to 850 represent excellent credit. This is the highest tier, achieved by people with impeccable credit histories. While the practical difference between 740 and 800 is minimal in terms of rates offered, this score opens every door in the credit world. People at this level have complete control of available credit and face no barriers to borrowing.

Practical takeaway: Determine your current credit score range and set a goal for the next range up. Even moving from poor to fair credit significantly expands your options.

How to Check Your Credit Score and Report

Before you can improve your credit, you need to know what information is being reported about you. There are multiple ways to access this information, and understanding the differences helps you get the complete picture.

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You're entitled to one free credit report from each of the three major credit reporting agencies—Equifax, Experian, and TransUnion—every 12 months. The official source for these free reports is annualcreditreport.com, which is authorized by the federal government. You should not pay for these reports; legitimate free reports are available without entering a credit card. A smart strategy is to request one report every four months, rotating between the three bureaus. This gives you ongoing monitoring throughout the year without paying.

Credit reports and credit scores are different things. Your credit report contains detailed information about your accounts, payment history, and inquiries. Your credit score is a number calculated from that information. When you review your free annual credit report, it won't include your credit score. Many credit card companies and banks offer free credit scores through their websites or apps. These scores are typically updated monthly and calculated using similar methods to what lenders use, though there are variations in scoring models.

When reviewing your credit report, look for several things. Check that all accounts listed are actually yours—fraudulent accounts sometimes appear on reports. Verify that payment history is accurate; late payments should show the correct