What Is A Credit Score And Why Is It Important?

Scores Summarize Your Credit Reports

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Lenders use credit scores to decide whether to approve you for a loan or credit card, and what interest rate to give you. Companies may also use your credit scores to determine whether to rent you housing or offer you a job, and how much to charge you for auto insurance. 

Because scores have so much influence, it’s crucial to understand how they work and the factors that make them rise or fall. 

What Is a Credit Score?

A credit score is a number that summarizes information from your credit reports. Scores typically range from 300 to 850, with higher scores being best. Lenders use credit scores to predict whether or not you’ll repay a loan, and other organizations evaluate you based on your credit as well.

Where Do Credit Scores Come From?

Credit scoring models use information in your credit reports to create a credit score, and that information resides primarily at the three major credit bureaus (Experian, TransUnion, and Equifax). Your credit reports contain information about loans and credit cards you’ve had in the past, any public records like bankruptcy, and loan or credit card payments you’re currently making.

An automated process: Reading through your credit history takes a significant amount of time, and lenders would have to spend considerable resources doing that for every applicant if they didn’t have credit scores. Plus, whoever is looking at your application might miss important details on credit reports or make judgment errors. Credit scores automate the process of evaluating creditworthiness by having a computer model analyze the information in your credit report and generate a credit score.

Your credit scores change over time as you make payments and creditors provide information. As a result, your scores may vary from day to day.

More than one score 

You have multiple credit scores, and there are several different types of scores. The scoring model most commonly used by lenders is the FICO score, and the other major model is VantageScore. The scores you’ll receive with each model may vary depending on which credit bureau supplies the information. Each agency has slightly different data, resulting in higher or lower scores at each source. 

Different scores for different purposes: Adding to the variety, different types of credit scores exist for different lending purposes. For example, there are specialized FICO scores for buying a vehicle and getting a credit card. Lenders might even design their own scores that they use internally.

Scores evolve: You may also come across different types of scores because the credit scoring models change over time. For example, the most recent version of the FICO score is FICO Score 9 (though FICO Score 8 is still the most widely-used score), and the latest version of VantageScore is VantageScore 4.0. 

Factors That Influence Your Credit Scores

All of those types of scores have slight variations in how they weigh different kinds of data. But in general, there is a handful of broad factors you should be concerned with that go into calculating your scores. For example, both the FICO and VantageScore models include your payment history as a significant factor, but they include other elements as well. 

Always make your loan payments on time. Your payment history is the most important factor in your credit score.

Credit score creators don't share the exact details of how they calculate scores, but they provide estimates that indicate which factors are most important.

Unlike your FICO score, your VantageScore is comprised of six key components that are slightly different from the FICO score components.

Payment history: Credit scores are designed to predict if you’ll make payments on time, so it’s no surprise that late payments in your credit history bring down your credit scores. To get the best scores, it’s essential that you pay bills on time.

Credit utilization ratio, total debt, and available credit: The less you owe, the less risky you are as a borrower. Your credit utilization ratio measures how much of your available credit you’re using. Credit scoring models penalize you if you’re using a high proportion of the credit available to you (maxing out your cards, for example). For best results, keep credit card balances between 10% and 20% of your credit limits—the lower, the better.

Length of credit history and age: With a long track record of successful borrowing and repaying, lenders are likely to believe you’ll continue that behavior. It can take time to build credit, but if you keep up with payments, your scores should improve over time. The length of your credit history is based on a number of factors, including the ages of your oldest and newest accounts and the average age of all your accounts.

To help your credit scores, be careful about closing credit card accounts, especially your oldest account. Closing cards impacts your credit utilization ratio and your credit history. As long as an open card doesn’t tempt you to rack up debt and the card doesn’t have an annual fee, it may be worth keeping it active by making a small purchase such as a tank of gas every few months. 

Credit mix: Scoring models consider what types of loans you’re using or have used in the past, including credit cards, auto loans, home loans, and more. Lenders like to see that you can handle a mix of different types of loans. 

Don’t apply for new loans just so you can improve your credit mix. The costs of debt outweigh any benefit you’d get from increasing your mix, which is one of the least important factors in your credit score.

New and recent credit: Opening new credit accounts quickly can signal that you’re facing financial difficulties and lead to lower scores. The fewer recent credit inquiries you have, the better it is for your scores.

What’s a Good Credit Score?

Most credit scores fall between 300 and 850. With higher scores, you have a better chance of getting approved for loans and qualifying for the best interest rates available.

FICO Score Ranges
Exceptional 800+
Very Good 740-799
Good 670-739
Fair 580-669
Poor Under 580
VantageScore Ranges
Excellent 750-850
Good 700-749
Fair 650-699
Poor 550-649
Very Poor Under 550

How to Check Your Credit Scores

It’s easy to see your credit scores, although you may have to pay for that information. Some credit bureaus provide credit scores for free, while others require you to pay or join a subscription service to see your credit scores.

You can view your credit reports for free each year under federal law, but credit bureaus are not required to provide free credit scores.

You might be able to get credit scores from other sources, as well. 

  • Credit card issuers sometimes provide free credit scores for customers. Ask your current credit card company if scores are available.
  • When you apply for a loan, you can ask the lender about your score during the application process.
  • Nonprofit credit counselors may be able to provide a free credit score.
  • VantageScore keeps a that offer free access to your score.
  • You can purchase FICO credit scores from credit bureaus or .

Because your credit scores depend on the information in your credit reports, your credit reports might be more important than your scores. Get your free credit reports, review the information, and fix any errors so that your score accurately reflects your borrowing history.