Credit Score 101: Everything You Need to Know

In the simplest terms, your credit report summarizes the history and current status of your credit activity. Based on your track record, your credit score estimates the odds you will pay your debts. Your credit report and score play a big role in determining whether you get approved for a credit card, a mortgage, or a personal or auto loan, and what interest rate you will pay. Your credit report also could be reviewed when you apply for an apartment, a mobile phone contract, an insurance policy, or a service such as home utilities. Because your credit can affect many different areas of your life, it’s important to keep tabs on your score and strive to prevent mishaps and errors that could bring it down. Here’s a primer.

How are credit scores calculated?

Credit reports and scores are separate products sold by different companies. FICO and VantageScore are the two main score purveyors whose proprietary formulas analyze the information in the credit reports compiled by Experian, Equifax, and/or TransUnion—the three major credit reporting bureaus. The result is a score that estimates the odds you will repay your debt.

The information in your file comes from your creditors—the companies lending you money—but not all creditors provide transaction details to all three credit agencies, so their reports are not identical. Credit scores also differ, depending on which formula the lender uses. Like mobile phone makers, FICO and VantageScore update their models periodically, but not all of their customers want to pay for upgrades, so many versions may be in use at once.

This means that, when someone checks your credit, your score will depend on which credit bureau it comes from and which scoring formula is used. “Outside the mortgage environment, most lenders pull only one credit report,” credit expert John Ulzheimer says.

What’s a good credit score?

FICO’s basic scores range from 300 to 850. A score of 800 or higher is “exceptional,” and 740 to 799 is “very good.” With a high score, you are very likely to obtain credit, with a low interest rate, FICO says on its website.

A score of 670 to 739 is “good” or “acceptable.” This score may or may not get you as low an interest rate as someone with a higher score. 

A FICO score of 580 to 669 is “fair.” With this subprime score, you may or may not get credit—and if you do, you will likely pay a higher interest rate.

If your score is 579 or lower, you’re considered a poor credit risk and may be rejected, according to FICO’s website. With this score, you may have to settle for a secured credit card, which generally requires a cash deposit equal to your credit line. And when you try to establish gas or electric service at your home, the utility may require a cash deposit as added insurance that you will pay your bill.

To compete with FICO, the three credit bureaus got together and launched VantageScore in 2006. Its latest score model also ranges from 300 to 850 (earlier versions range from 501 to 990).

Where can I find my credit report and score?

By law, consumers may request one free copy of their credit report from each of the three bureaus once a year at annualcreditreport.com. This official credit report does not include your credit score, and requesting a report will not affect your score.

Websites such as Credit Karma, Credit Sesame, and others also provide credit reports and scores, and not just once a year. The reports are often repackaged summaries of information pulled from your file at one bureau, and it’s not always clear what scoring formula the website is using. The scores and reports are reliable, Ulzheimer says, but “you will have to register and put up with marketing materials.”

Many banks and credit card companies give customers regular access to their FICO scores, which can fluctuate from month to month based on your spending and repayment activity.

If a company rejects your application for credit or insurance (or offers you less favorable terms) and a score was used in its decision, the company must give you the score and a notice that entitles you to a free copy of the credit report that was used, according to the Federal Trade Commission.

What goes into my credit score?

FICO weighs five different aspects of your credit activity to determine your credit score, says Can Arkali, FICO's senior director for analytics and scores development. Here's how it all breaks down:

• Payment History: For the average consumer, your payment history makes up 35 percent of your FICO score, Arkali says. With negative information, the more severe and recent it is, the more it will lower your score. If you start off with a high score, a late payment or charge-off will cause a bigger drop than if you started off with a lower score. (A charge-off is an unpaid debt the creditor has stopped trying to collect.)
• Amounts Owed: Amounts owed influences another 30 percent of your score. This includes your credit utilization rate. For installment debt such as auto and home loans, the formula looks at how much of your original debt has been paid off; the more the better. For credit cards, this rate is calculated by adding up the balances on all of your cards and dividing by your combined credit limits. The higher this ratio, the higher your credit risk. Even if you pay off your cards each month, your balance could be greater than $0 because many lenders report the balance from your last monthly statement to the credit bureaus each month. 
• Length of Credit History: Your credit history makes up 15 percent of your score, and longer is better. The formula puts more weight on active accounts than ones that you are not using regularly or have closed, Arkali says. 
• New Credit: New credit makes up 10 percent of your score. When you apply for credit and a lender pulls your credit report, it could ding your score. If you open new accounts, it could drop further. However, if you are shopping for a home or car loan, all credit inquiries within a limited time (typically 45 days or so for FICO) are counted as a single inquiry, so you’re not penalized for interest-rate shopping. 
• Types of Debt: Finally, you’ll get extra points for carrying multiple types of debt, such as a car loan, a student loan, a credit card, and a mortgage. This accounts for the remaining 10 percent of your FICO score.

VantageScore looks at similar factors, but it doesn’t provide a breakdown of components.

How can I improve my credit score?

To improve your score, “pay your bills on time, stay out of debt, and apply for credit only when you need it,” Ulzheimer says.

Think twice about closing a credit card you don’t use. Although a closed account will stay on your credit report for years and count toward your length of history, it could lower your utilization rate. You could offset this by requesting a higher limit on your other cards, or getting another card to keep your total available credit equal, and make it easier to keep your total utilization rate under the generally recommended maximum of 20 to 30 percent.

If you can’t establish credit on your own, consider getting a co-signer or a secured credit card. You could also become an authorized user on someone else’s credit card, such as a parent or partner, if the credit card agency includes authorized users in its reports. The primary card holder’s use of the card will be reflected on your credit report and—for better or worse—affect your score.

Also, check your credit report regularly for errors. Ideally, stagger your free annual credit reports, so you can check one from each bureau every four months* or so. To dispute an error, write to each credit bureau where the error appears and provide supporting documentation, if possible. The bureau must investigate, which usually means contacting the company that supplied the disputed information. If that company acknowledges the error, the bureau must correct it and, if you request it, notify anyone who received a copy of your report over the past six months. If the reporting agency says the information is correct, you can put a statement disputing it in your file, but there is no guarantee anyone will see it when they access your report, Ulzheimer says. You can also file a complaint with the Consumer Financial Protection Bureau, a U.S. government agency that is meant to protect consumers and ensure banks, lenders, and other financial companies treat consumers fairly.

Mistakes can be caused by sloppiness, name mix-ups, or identity thieves who fraudulently obtain credit in your name. To prevent identity theft, “be careful what you share, especially your Social Security number,” says Lisa Schifferle, a Federal Trade Commission attorney. “Install antivirus software on your computer and keep it up to date. And don’t use public wifi for personal information,” such as online banking.

The most effective way to head off financial ID theft is to put a credit freeze on your file, which prevents anyone other than lenders with whom you have a relationship with from seeing it. Thieves can’t open an account in your name if a prospective lender can’t access your file. Since September 2018, you can place and lift a freeze for free as often as you want by contacting each credit bureau separately.

The downside of a freeze is that you must lift it when you want a potential lender, employer, or landlord to see your credit report. Alternatively, but less effective: You can place a free one-year fraud alert on your file, which tells businesses that pull your credit to check with you before opening a new account. To place a fraud alert, you only need to contact one bureau; it will notify the others.

You can also subscribe to credit monitoring services, which alert you whenever there is a substantial change to your credit report. These are unnecessary if you freeze your credit, Ulzheimer says.

However, Schifferle advises, “if you are part of a data breach and the company is offering free credit monitoring, take advantage of it.”

*Editor's note: In light of the pandemic, Equifax, Experian, and TransUnion are providing free weekly online reports.