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Personal Finance
Understanding Credit Scores: What They Are and How to Improve Yours
Your credit score affects mortgage rates, loan approvals, and borrowing costs. Learn how scores are calculated, what hurts them, and how to build strong credit.
Understanding Credit Scores: What They Are and How to Improve Yours
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What Credit Scores Are
- A credit score is a three-digit number (300-850) summarizing your creditworthiness
- FICO scores are used in 90% of lending decisions, VantageScore is the main alternative
- Scores are calculated from data in your credit reports at Equifax, Experian, and TransUnion
- Different scoring models can produce different scores from the same report data
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Full Guide
What Credit Scores Are
- A credit score is a three-digit number (300-850) summarizing your creditworthiness
- FICO scores are used in 90% of lending decisions, VantageScore is the main alternative
- Scores are calculated from data in your credit reports at Equifax, Experian, and TransUnion
- Different scoring models can produce different scores from the same report data
The Five Factors Behind Your Score
- Payment history (35%), on-time payments are the single most important factor
- Credit utilization (30%), the percentage of available credit you are currently using
- Length of credit history (15%), older accounts demonstrate long-term reliability
- Credit mix (10%) and new inquiries (10%) round out the remaining factors
Score Ranges and What They Mean
- 800-850: Exceptional, qualifies for the best rates and terms available
- 740-799: Very Good, qualifies for most competitive rates on loans and credit
- 670-739: Good, generally approved but may not receive the lowest rates
- Below 670: Fair to Poor, higher rates, more limited options, or possible denial
How to Improve Your Score
- Pay every bill on time, even one 30-day late payment can drop your score significantly
- Keep credit utilization below 30%, and ideally below 10%, of each card's limit
- Keep old accounts open, closing them shortens your history and raises utilization
- Limit hard inquiries by rate-shopping within a short window (14-45 days counts as one)
Common Credit Score Myths
- Checking your own score is a soft inquiry, it does not hurt your credit
- Closing unused cards actually raises utilization and shortens history
- Carrying a balance does not build credit, paying in full each month works just as well
- Income is not a factor in credit score calculations despite common belief
Impact on Borrowing Costs
- A 100-point score difference can mean 0.5-1.5% higher mortgage interest rates
- On a $400K mortgage, a 1% rate difference costs roughly $80K more over 30 years
- Auto loans, personal loans, and insurance premiums are also influenced by credit scores
- Strong credit saves thousands over a lifetime, it is worth actively maintaining
Protecting Your Credit
- About 1 in 5 consumers has an error on at least one credit report, check yours regularly
- AnnualCreditReport.com provides free credit reports from all three bureaus weekly
- Dispute errors directly with the bureau online, by mail, or by phone
- A credit freeze prevents new accounts from being opened in your name, free to set up
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