What is a credit score? A complete guide
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“Verified by an expert” means that this article has been thoroughly reviewed and evaluated for accuracy.
BLUEPRINT
Published 5:00 a.m. UTC Nov. 28, 2023
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A good credit score could benefit your financial future in many ways. To have a better shot at earning good credit, it helps to understand what a credit score is and how it works.
This guide will help you understand credit score basics and the factors that influence these important numbers. You’ll also discover why your credit scores matter so much in the first place, along with expert tips on how to improve your credit score if it’s not where you want it to be yet.
What is a credit score?
A credit score is a tool that banks and other businesses use to predict the risk of lending you money. Your credit score — a three-digit number that ranges from 300 to 850 — shows lenders how likely you are to pay your bills on time.
A lower credit score indicates that you’re more likely to pay severely late (by 90 days or worse within the next 24 months) or not at all. A higher score predicts the opposite.
How it works
In the United States, there are two main types of credit scores — FICO and VantageScore. And since 90% of top lenders use FICO® Scores, there’s a good chance your FICO Score will determine if you qualify for financing and the price you pay for it when you apply for a loan or get a credit card.
In addition to credit score brands, there are also different versions of credit scores. (Think 1.0, 2.0, 3.0, etc.) FICO® Score 8 is the most widely used version of the FICO Score right now. Yet some lenders may also use otherversions, including FICO® Score 9, FICO® Score 10, VantageScore 3.0, VantageScore 4.0, etc. The version used may depend on the type of credit you’re applying for, as lenders tend to use different FICO Score versions for making decisions on auto loans, credit cards and mortgages.
Although there are many different types of credit scores, it’s helpful to keep in mind that each one essentially uses a sophisticated software program to determine risk. All credit scoring models consider the information on your credit report from one of the major credit bureaus when calculating your credit score.
If your credit report contains negative information, it could lower your credit score. But if you have a clean credit report, that should boost your credit score no matter which scoring model or version a lender uses.
Got a copy of your credit report and don’t know how to interpret it? Here’s how to read it.
Factors that impact your credit score
FICO and VantageScore use different formulas to calculate your credit scores. Yet the same basic details from your credit report impact your credit score positively or negatively.
- Payment history: The most important information any credit scoring model considers is whether you pay your bills on time. The bulk of your FICO Score — 35% — comes from your payment history. Payment history has a large influence on your VantageScore as well.
- Amounts owed: How much debt you’re carrying also affects your credit score, counting for 30% of your FICO Score. Credit utilization — the percentage of your available credit in use on your credit cards — can have a big impact on your credit score.
- Length of credit history: A longer track record of managing credit also can help your credit score.. Length of credit history is worth 15% of your FICO Score, and your credit experience also impacts your VantageScore. To determine length of credit history, FICO looks at a variety of factors, including: the age of your oldest account, the age of your newest account and the average age of all your accounts together.
- New credit: When you apply for a new loan, credit card, or other financing, a lender may make a hard credit inquiry, which is a credit check used to make a lending decision. A hard inquiry may cause a slight dip of less than five points that can affect your score for about a year. One or two hard inquiries shouldn’t have too much impact, but too many in a short time could hurt your score.
- Credit mix: Both FICO and VantageScore credit scores consider the types of accounts on your credit report. Variety — for example, having an auto loan, a mortgage, a personal loan and a few credit cards — is considered a plus. Your credit mix and experience are highly influential over your VantageScore credit score. And credit mix is worth 10% of your FICO Score — less influential, but still relevant.
What is a good credit score?
The highest credit score you can earn is 850. But you don’t need a perfect 850 to enjoy the benefits of a good credit score.
As mentioned, credit scores range from 300 to 850, and each lender decides what it considers to be a good credit score. But in general, a credit score of 670 or higher is considered to be a good credit score.
However, if you hope to qualify for the best offers from lenders and credit card companies, it’s wise to aim for a credit score of 740 or higher (very good credit or exceptional credit). Excellent credit can improve your approval odds and give you access to better interest rates and borrowing terms.
What is a bad credit score?
A FICO Score of 579 or lower is considered to be poor. With VantageScore, a score under 600 is considered poor, and 499 or below is very poor.
It’s important to understand that having no credit history isn’t the same thing as having a bad credit score. It’s typically easier to build credit from scratch than it is to rebuild damaged credit after a problem. Yet even if you have past credit issues, there are ways to overcome those setbacks and repair your credit for the future.
Why is my credit score important?
Monitoring your credit score frequently is a wise habit. Others often rely on your credit score to make decisions that can impact your financial and personal life.
A good credit score might:
- Make it easier to qualify for loans and credit cards.
- Help you qualify for lower interest rates and better borrowing terms.
- Get you approved to rent an apartment or a house.
- Reduce the size of your security deposits for utilities, leases, and more.
- Save you money on insurance premiums.
Your credit score may not be the only factor that matters in each of the situations above. But if you don’t have a good credit score, it could make you ineligible for financing or potential savings altogether.
Tips for boosting your credit score
Building or improving your credit takes time, but the benefits are worth the effort. Although there are no magic wands or shortcuts when it comes to credit improvement, the following tips may help build your score.
- Reduce your credit card debt. Paying down credit card debt is typically a wise financial decision. It could also lower your credit utilization ratio and improve your credit score.
- Dispute credit errors. It’s important to check your credit reports often and make sure they contain accurate information. (Tip: You can now get free copies of your credit report once a week at AnnualCreditReport.com.) If you find errors on your credit report, take action and file a dispute with the appropriate credit reporting agency. Mistakes on your credit report could harm your credit score, so it’s important to act quickly.
- Establish positive accounts. Making sure you have positive accounts on your three credit reports is an important step in building a good credit history (and eventually a credit score). Over time, you may want to consider opening credit cards, installment loans, and other tradelines. Becoming an authorized user on a family member or friend’s credit card might also be helpful, if the account has been paid on time and has a low (or no) balance.
- Pay on time. No matter what type of accounts you open, it’s essential to manage them responsibly. You’ll want to avoid late payments at all costs. It’s also a good idea to get in the habit of paying your credit card bills in full each month to avoid high interest and keep your credit utilization ratio low.
The average VantageScore 4.0 credit score for Gen Z (ages 27 and younger) is 662 as of May 2023. Overall, the average credit score in the United States was 702 for the same time period.
It’s important to point out that average credit scores vary not only by age, but also based on geographic location throughout the country. For example, people in the North tend to have higher credit scores than those in Southern states, though there are some exceptions.
Credit scores range from 300 to 850. A FICO Score that falls below 580 is a poor credit score. Meanwhile, a VantageScore under 600 is considered poor and 499 or below is very poor.
There are many factors on a credit report that might impact your credit score negatively and cause you to earn a poor credit score. Late payments, collection accounts and excessive inquiries are a few examples of derogatory items that might damage your credit score.
Every situation is different. Yet for many people, paying down credit card debt (and therefore lowering their credit utilization ratio) is one of the most actionable ways to boost a credit score because amounts owed make up such a large chunk of your score. And unlike, say, waiting for a past late payment to fall off your credit reports, it’s something over which you have more control.
There’s no minimum credit score to buy a car. Each lender sets its own qualification requirements, and some auto lenders may be willing to work with borrowers who have very low credit scores.
Yet the better your credit score, the better your car loan options. Bad credit scores, on the other hand, may limit you. With bad credit you may face higher interest rates, co-signer requirements, larger down payment requirements, and other unattractive loan terms.
If a lender or credit card company reports an account to one or more of the three major credit bureaus — Equifax, TransUnion, or Experian — the item could have an impact on your credit score. Other bills that don’t appear on your credit report shouldn’t affect your credit score. But be careful. If you stop paying certain bills as agreed, like mobile phone or utility bills, they might end up on your credit report as collection accounts in the future, causing a significant negative impact on your score.
Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.
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