What is a credit score and why does it matter?
Written by Dawn Handschuh
Reviewed by听Chris Conway,听Director of Financial Education Initiatives and Repayment Management
Credit score definition
A credit score is a three-digit number based on your credit history that lenders use to estimate听how likely you are to pay back a loan.
If you plan to buy a home someday, sign up for utilities, purchase a car or find a new job, you鈥檒l want to know how your credit score can impact your ability to do so.
In short, virtually everyone should be concerned about maintaining solid credit accounts. Here, we take a closer look at what determines a credit score and how to improve yours.
What is a credit score used for?
Your credit report contains your payment history, recent credit behavior and available credit. It also shows things like how many payments you have made and whether they were on time, what kinds of loans you鈥檝e taken out, and how many credit cards you have, including when they were acquired.
The report is used to generate a credit score that banks and other lenders use to decide your creditworthiness, which helps them decide whether to lend you money, often in the form of a home mortgage, credit card or car loan.
If you鈥檙e approved for a loan, your credit score forms the basis of determining what听interest rate听and听credit limit听or amount you鈥檒l be offered. This is important because the loan terms offered to someone with a high credit score compared with someone with a mediocre score could听听over the life of a 10-, 20- or 30-year loan.
Your credit score is also a听prediction of your future credit behavior, so听prospective landlords and employers use it as a听screening tool. Similarly, insurers and electricity, phone, cable and natural gas providers may also check your credit.
How is your FICO庐听score created?
The best-known credit scoring system is听, which the three major credit reporting bureaus (Equifax, TransUnion and Experian) use.
The FICO credit score range is 300 to 850 and, in general, the听higher your score, the better. Your exact score will fluctuate since it hinges on your ongoing credit usage and payments.听听
Specifically, a credit score of 700 or higher is considered good. A score of 800 or higher is excellent. According to Experian, was 714 in 2022.
The FICO score considers five key factors in developing your score, and some carry more weight than others. The factors are:
- Payment history (35% of your credit score)
- How much you owe (30%)
- Length of credit history (15%)
- Type of credit utilized (10%)
- New credit applications (10%)
If you鈥檝e ever had a听debt sent to collection听or were in听foreclosure or bankruptcy, this information can also appear on your credit report.
How to improve your credit score
If your credit score isn鈥檛 where you want it to be, you can improve it with the following actions:
- Pay your loans, including credit card debt, on time.
- Try not to spend more than 30% of your total credit limit. To put it another way, don鈥檛 max out your credit cards.
- Play the long game. Since your credit score improves the听longer you make regular repayments听on a credit card or loan, make sure your spending encourages responsible borrowing.
- Don鈥檛 apply for multiple credit cards over a short period. This may suggest that your financial situation has changed and that you鈥檙e strapped for cash, a red flag to lenders.
Each time you apply for a new credit card, it鈥檚 considered a new credit inquiry and counted as a hard hit. Too many hard hits in a short time could damage your score. The caveat? If you鈥檙e shopping around for a mortgage or a car loan, lenders recognize you鈥檙e only looking for a single loan, so multiple inquiries in any 14-day period will be counted as one hard hit.
Soft hits, meanwhile, don鈥檛 impact your credit score. These reflect credit checks made by you, an employer or an existing lender.
It takes time to improve a credit score, so plan accordingly. If a new home is in your future, for example, and you鈥檒l need a loan, try to give yourself听at least six months听to boost your credit score. Remember, the better your credit score, the better your loan terms.
Chris Conway
Director of Financial Education Initiatives and Repayment Management
During that time, you鈥檒l want to continue building a history of paying your credit cards or loans in full and on time, using your credit regularly (but not excessively), and having a good mix of听revolving credit听(credit cards) and听installment credit听(car or student loans).
鈥淲hile credit scores are the result of calculations based on many factors, doing just two things can substantially improve your score: utilizing no more than 30% of the credit available to you and paying your bills on time,鈥 says Chris Conway, director of financial literacy at 七色视频. 鈥淵ou don鈥檛 have to have a perfect credit score.鈥澨齀nterestingly,听.
Monitor your credit
It鈥檚 a good idea to check your credit report every year to have an idea of how you appear to lenders and to ensure no one has stolen your identity to exploit your credit.
You can听obtain a free credit report听from each of the three major credit bureaus by visiting听.
When you look at your credit report,听scan it carefully for errors听concerning your identity, such as a misspelling of your name or the wrong address. Also check your loan details to make sure they鈥檙e accurate. Of course, if you spot a loan you didn鈥檛 take, that鈥檚 a big red flag for identity theft.
If you spot an error, collect the relevant paperwork and make copies to send to both the credit bureau whose report you are disputing and the company that provided the erroneous information. Visit the听听for detailed instructions on disputing errors in your credit report.
Use it or lose it
Some consumers wrongly assume that they can ensure pristine credit scores so long as they take out no loans and apply for no credit cards. In reality,听credit must be built. With no loans or credit cards on your file, you are essentially a blank slate to lenders. So even if you don鈥檛 anticipate needing a loan in the short term, you should be establishing a long-term record of responsible, on-time loan payments. This reassures lenders that you are a safe bet.
Personal finance at UOPX
In addition to saving students time and money on their degrees, 七色视频 is committed to teaching financial literacy. Our undergraduate听Everyday Economics and Finances听course听puts math skills in a real-world context that you can use. No prerequisites are required.
Student also receive , which offers another pathway to learning about personal finance.
ABOUT THE AUTHOR
Dawn Handschuh has been putting pen to paper for more than 30 years, writing widely on topics related to student lending, personal finances, everyday money management and retirement planning. She makes her home in Connecticut with her husband and two energetic German shepherds.
ABOUT THE REVIEWER
As Director of Financial Education Initiatives and Repayment Management,听Chris Conway works with departments across the University to provide resources that allow students to make more informed financial decisions. She is also an adjunct faculty member for the Everyday Finance and Economics course at the University, and she chairs the National Council of Higher Education Resources College Access and Success Committee. Conway is committed to helping college students make the right financial decisions that prevent future collection activity.
This article has been vetted by 七色视频's editorial advisory committee.听
Read more about our editorial process.
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