A credit score is a three-digit number that lenders use to evaluate borrowing risk. Understanding what a credit score is and how it works can save thousands of dollars over a lifetime. This number affects mortgage rates, car loan approvals, and even rental applications.
Most Americans have credit scores between 300 and 850. The higher the score, the better the terms a borrower receives. But many people don’t know the factors that influence their score, or how to improve it. This guide breaks down credit score basics and provides practical tips to build better credit.
Key Takeaways
- A credit score is a three-digit number (300–850) that lenders use to evaluate your borrowing risk and determine loan terms.
- Payment history accounts for 35% of your credit score, making on-time payments the single most important factor.
- Keep credit utilization below 30% of your available credit limit to maintain a healthy score.
- Avoid closing old credit accounts, as this shortens your credit history and reduces available credit—both of which can lower your score.
- Check your credit reports regularly at AnnualCreditReport.com to catch errors or fraud that could be dragging down your score.
- Carrying a balance doesn’t build credit—pay your balances in full each month to avoid interest while still improving your credit score.
How Credit Scores Work
Credit scores measure how likely a person is to repay borrowed money. Three major credit bureaus, Equifax, Experian, and TransUnion, collect financial data and generate these scores. Each bureau may calculate a slightly different number based on the information it receives.
The most common credit score model is FICO, used by about 90% of lenders. FICO scores range from 300 to 850. VantageScore is another popular model that uses the same range. Both models weigh similar factors, though they calculate scores differently.
Here’s a general breakdown of credit score ranges:
- Excellent: 800–850
- Very Good: 740–799
- Good: 670–739
- Fair: 580–669
- Poor: 300–579
Lenders pull credit scores when someone applies for a credit card, mortgage, auto loan, or personal loan. Landlords and employers sometimes check credit reports too. A higher credit score typically means lower interest rates and better approval odds.
Credit scores update regularly as new information flows to the bureaus. A single late payment can drop a score by 100 points or more. Positive actions, like paying down debt, can raise it over time.
Key Factors That Affect Your Credit Score
Five main factors determine a credit score. Each carries a different weight in the calculation.
Payment History (35%)
Payment history is the most important factor. Lenders want to see consistent, on-time payments. Even one late payment, 30 days or more past due, can hurt a credit score significantly. Bankruptcies and collections also appear here and damage scores for years.
Credit Utilization (30%)
Credit utilization measures how much available credit a person uses. It’s calculated by dividing total credit card balances by total credit limits. Experts recommend keeping utilization below 30%. Someone with a $10,000 credit limit should aim to carry less than $3,000 in balances.
Length of Credit History (15%)
Older accounts help credit scores. This factor considers the age of the oldest account, the newest account, and the average age of all accounts. Closing old credit cards can shorten credit history and lower scores.
Credit Mix (10%)
Credit mix refers to the variety of credit accounts someone has. A combination of credit cards, installment loans, and mortgages shows lenders that a person can manage different types of debt. But, no one should open accounts just to improve this factor.
New Credit Inquiries (10%)
Applying for new credit triggers a hard inquiry on a credit report. Too many hard inquiries in a short period can lower a credit score. Each inquiry typically drops a score by a few points and stays on the report for two years.
Practical Tips to Improve Your Credit Score
Improving a credit score takes time, but the right strategies speed up the process. Here are proven tips to build better credit.
Pay Bills on Time, Every Time
Set up automatic payments or calendar reminders. Even a single missed payment can tank a credit score. Payment history carries the most weight, so consistency matters most.
Lower Credit Card Balances
High balances hurt credit utilization ratios. Pay down credit cards strategically, start with the cards closest to their limits. Some people make multiple payments per month to keep balances low.
Don’t Close Old Accounts
Keep old credit cards open, even if they’re rarely used. Closing them shortens credit history and reduces available credit. Both changes can lower a credit score. Charge a small purchase occasionally to keep the account active.
Limit Hard Inquiries
Space out credit applications. Each hard inquiry affects a credit score. When shopping for mortgages or auto loans, submit applications within a 14- to 45-day window. Credit bureaus typically count these as a single inquiry.
Check Credit Reports for Errors
Mistakes happen. Incorrect late payments, wrong account balances, or fraudulent accounts can drag down a credit score. Everyone can access free credit reports at AnnualCreditReport.com. Dispute errors directly with the credit bureaus.
Become an Authorized User
Someone with thin credit can ask a family member with excellent credit to add them as an authorized user. The primary cardholder’s positive payment history can boost the new user’s credit score. This works best when the account has a long history and low utilization.
Use a Secured Credit Card
People with poor or no credit can start with a secured credit card. These cards require a cash deposit that becomes the credit limit. Responsible use builds credit history over time.
Common Credit Score Mistakes to Avoid
Some actions hurt credit scores more than people realize. Avoiding these mistakes protects financial health.
Missing Payments
Late payments stay on credit reports for seven years. Even a few days late doesn’t usually matter, but 30 days late definitely does. Set up autopay for at least the minimum payment on every account.
Maxing Out Credit Cards
High credit utilization signals financial stress to lenders. Maxing out cards, even if they’re paid in full each month, can temporarily lower a credit score. The balance reported to bureaus is usually the statement balance, not zero.
Applying for Too Much Credit
Every credit application creates a hard inquiry. Several applications in a short time raise red flags for lenders. A credit score can drop 10 points or more from multiple inquiries.
Ignoring Credit Reports
Many people never check their credit reports until they need a loan. Errors and fraud can go unnoticed for years. Regular monitoring catches problems early.
Closing Credit Cards After Paying Them Off
Paying off a credit card feels great, but closing it can backfire. The action reduces available credit and can shorten credit history. Both hurt a credit score. Keep the card open and use it occasionally instead.
Carrying Balances to “Build Credit”
This is a common myth. Carrying a balance doesn’t improve a credit score. It just costs money in interest. Pay balances in full each month to avoid interest charges while still building credit history.
