Understanding Your Credit Score: What It Is and How to Improve It

## What Is a Credit Score? A credit score is a three-digit number, typically ranging from 300 to 850, that summarizes your creditworthiness — essentially, how likely you are to repay borrowed money. Lenders, landlords, insurers, and even some employers use this number to make decisions about you. A higher score means you look like a lower risk, which translates to better loan rates, easier approvals, and sometimes lower insurance premiums. Your credit score isn't a single, universal number. You actually have multiple credit scores because there are different scoring models and three major credit bureaus (Experian, Equifax, and TransUnion) that each maintain their own version of your credit history. The two most widely used scoring models are FICO and VantageScore. ## FICO vs. VantageScore **FICO scores** are used by approximately 90% of top lenders. Developed by Fair Isaac Corporation, FICO has been the industry standard since 1989. There are multiple versions (FICO 8 is the most common, but FICO 9, 10, and 10T are increasingly used), and each version weighs factors slightly differently. **VantageScore** was created jointly by the three credit bureaus as a competitor to FICO. VantageScore 3.0 and 4.0 are the current versions. While less commonly used for lending decisions, VantageScore is the model behind many free credit score tools, including those from Credit Karma and your banking app. Both models use the same 300-850 range, but they may produce different numbers for the same person because they weigh factors differently. A 720 FICO doesn't necessarily equal a 720 VantageScore. ## Credit Score Ranges Here's what the numbers generally mean: - **800-850 (Exceptional)**: You qualify for the best rates and terms available. Only about 20% of Americans have scores in this range. - **740-799 (Very Good)**: You'll get excellent rates on most products. Lenders see you as a very low risk. - **670-739 (Good)**: You'll qualify for most loans and credit cards, though not always at the best rates. This is considered a solid, above-average score. - **580-669 (Fair)**: You can still get approved for many products, but rates will be higher. Some prime credit cards may be out of reach. - **300-579 (Poor)**: Approvals are difficult and rates are steep. Secured credit cards and credit-builder loans are your best tools for improvement. The practical difference between score ranges is significant. On a 30-year, $300,000 mortgage, the difference between a 760 score and a 660 score could mean $100 to $200 more per month in payments — tens of thousands of dollars over the life of the loan. ## The 5 Factors That Determine Your FICO Score Your FICO score is calculated from five categories of information in your credit reports, each weighted differently: ### 1. Payment History (35%) This is the single most important factor. It tracks whether you've paid your bills on time across all your credit accounts — credit cards, loans, mortgages, and other debts. A single late payment (30+ days past due) can drop your score by 60 to 110 points, and the damage takes years to fully recover. The severity of a late payment matters: 30 days late hurts less than 60, which hurts less than 90, which hurts less than a collection or charge-off. Recent late payments hurt more than old ones. And a pattern of late payments hurts more than an isolated incident. ### 2. Amounts Owed / Credit Utilization (30%) This measures how much of your available credit you're using, expressed as a percentage called credit utilization. If you have a credit card with a $10,000 limit and a $3,000 balance, your utilization on that card is 30%. Keeping your overall utilization below 30% is the commonly cited guideline, but lower is better. People with the highest credit scores typically keep utilization below 10%. Maxing out a card — even if you pay it off in full every month — can temporarily tank your score if the high balance is reported before your payment posts. ### 3. Length of Credit History (15%) This considers the age of your oldest account, the age of your newest account, and the average age of all your accounts. Longer history is better because it gives lenders more data to assess your behavior. This is why closing old credit cards can hurt your score — you lose the history associated with that account (in VantageScore, closed accounts continue to age; in FICO, they eventually fall off). If you have an old card with no annual fee, keep it open even if you rarely use it. Charge a small recurring subscription to it and set up autopay so it stays active. ### 4. New Credit / Hard Inquiries (10%) When you apply for a new credit card, loan, or line of credit, the lender pulls your credit report, creating a "hard inquiry." Each hard inquiry can lower your score by a few points and stays on your report for two years (though the scoring impact fades after about a year). Multiple applications in a short period look risky to lenders — it suggests you might be desperate for credit or taking on too much debt at once. However, rate-shopping is treated differently. Multiple inquiries for a mortgage, auto loan, or student loan within a 14-to-45-day window are typically counted as a single inquiry. Soft inquiries — like checking your own credit, pre-approval offers, or employment background checks — don't affect your score at all. ### 5. Credit Mix (10%) Lenders like to see that you can manage different types of credit responsibly. Credit mix considers whether you have a variety of accounts — revolving credit (credit cards), installment loans (auto loans, student loans, mortgages), and retail accounts. Don't open new accounts just to improve your credit mix — the impact is small, and the hard inquiry and new account could temporarily lower your score. This factor matters most when the rest of your credit profile is thin. ## How to Check Your Score for Free You have several free options: - **AnnualCreditReport.com** — free weekly credit reports from all three bureaus (no score, but you can see the data behind it) - **Your bank or credit card issuer** — most major banks now provide free FICO or VantageScore access through their apps - **Credit Karma** — free VantageScore from TransUnion and Equifax, updated weekly - **Experian** — free FICO Score 8 through their website or app - **Discover Credit Scorecard** — free FICO score, available to anyone (you don't need a Discover card) Checking your own score is always a soft inquiry and never affects your credit. ## Actionable Steps to Improve Your Score 1. **Pay every bill on time, every time** — set up autopay for at least the minimum payment on every account. This protects the most heavily weighted factor. 2. **Pay down credit card balances** — reducing your utilization ratio is the fastest way to boost your score. Pay balances below 30% of your limits, and ideally below 10%. 3. **Don't close old accounts** — keep your oldest cards open to maintain your credit history length. Use them occasionally so the issuer doesn't close them for inactivity. 4. **Limit new applications** — only apply for credit you genuinely need. Each application creates a hard inquiry. 5. **Become an authorized user** — if a family member with excellent credit adds you to one of their old, well-managed cards, their positive history on that account can boost your score. 6. **Dispute errors on your credit reports** — about 25% of credit reports contain errors. Review yours annually and dispute anything inaccurate through the bureau's website. 7. **Consider a credit-builder loan** — if you have thin credit, a credit-builder loan (offered by many credit unions) helps establish payment history with minimal risk. ## Common Myths Debunked **Myth: Checking your own credit hurts your score.** Fact: Checking your own credit is a soft inquiry and has zero impact on your score. Check it regularly. **Myth: Carrying a balance improves your score.** Fact: You don't need to carry a balance or pay interest to build credit. Using your card and paying in full each month is the ideal approach. **Myth: Closing a credit card removes it from your report.** Fact: Closed accounts remain on your credit report for up to 10 years. Closing a card can hurt your score by increasing your overall utilization ratio and eventually reducing your average account age. **Myth: Your income affects your credit score.** Fact: Your income, employment, bank balances, and debit card usage have no direct impact on your credit score. Scores are based solely on your credit report data. **Myth: All debt is bad for your score.** Fact: Responsibly managed debt — making payments on time, keeping balances reasonable — actually builds your score. A mix of well-managed accounts is better than no accounts at all.