Understanding credit scores — the basics

Your credit score can impact your mortgages, bills, loans, and even vehicle financing, so it’s a good idea to know how it works.

Not sure what credit is or how it works? That’s okay — you’re not alone. About 40% of Americans say that they don’t know what goes into their credit score.

No matter where you stand, it’s important to understand credit. Your credit score can impact your mortgages, bills, loans, and more — including vehicle financing. This score helps creditors predict how risky it is to extend credit to you. The higher your score, the less risk you pose. This means lower interest rates and more available credit.

But credit scores go beyond banks, too. Some employers even run credit checks to help decide who to hire. With all that at stake, it’s crucial to know your credit. So let’s start with the basics.

 

What is a credit score? 

A credit score is a number that rates how likely you are to pay bills on time, otherwise known as your “creditworthiness.” The most common type is a FICO® score, used by 90% of top lenders.

A FICO® score is based on past behavior, including:

1. Payment history: Do you pay your bills on time?
2. Amounts owed: How much money have you taken out?
3. Length of credit history: How long have you been using each credit account?
4. Credit mix: Do you have just credit cards or other kinds of credit, like loans and retail accounts?
5. New credit: How many credit accounts have you recently opened? 

This information comes from your credit history, a log of your financial decisions collected by one of the three major credit reporting bureaus: Experian, Equifax, and Trans-Union. FICO then uses that data to create your FICO® score.

How does the credit score scale work?

Your credit score is a three-digit number that typically ranges from 300 to 850. The higher the number, the better your credit score. Here’s a breakdown of the scale:

0 - 580: Poor

580 - 669: Fair

670 - 739: Good

740 - 799: Very good

800 - 850: Exceptional

In general, you want your credit score to be in the high 600s at the very least. Lenders usually see this number as dependable, driving down finance charges.

How do I look at my credit report?

If you want to see your credit report, look no further than Equifax, Experian, and Trans-Union. These are the three agencies that collect data to make your credit report. Your score might be slightly different depending on which agency compiled it.

Once a year you can also request a free credit report from each agency at AnnualCreditReport.com.

Your credit report won’t show your credit score, however. To differentiate between credit scores and credit reports, read our other article here.

Unlike age, credit scores aren’t just a number.

Your credit score can be stressful to think about, but addressing it can help you save on your finance and credit transactions. For some tips on how to keep your credit high, check out our other article here.