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Understanding Credit Scores

A comprehensive guide to how credit scores work, what factors affect them, and how to interpret your credit reports.

What is a Credit Score?

A credit score is a three-digit number that represents your creditworthiness—how likely you are to repay borrowed money. Lenders, landlords, insurers, and even employers use this number to make decisions about you.

Your credit score is calculated based on information in your credit reports, which are maintained by three major credit bureaus: Experian, Equifax, and TransUnion. Since each bureau may have slightly different information, your score can vary between bureaus.

Credit Score Ranges

800-850
Exceptional
Well above average. Lenders view you as an ideal borrower.
740-799
Very Good
Above average. You qualify for better-than-average rates.
670-739
Good
Near or slightly above average. Most lenders consider this acceptable.
580-669
Fair
Below average. You may have difficulty getting credit.
300-579
Poor
Well below average. You may be denied credit or pay high rates.

The 5 Factors That Determine Your Score

Understanding what affects your score is the first step to improving it. Here's how FICO calculates your credit score:

Payment History

35%

Your track record of paying bills on time. This is the single most important factor.

Key Points:

  • Always pay at least the minimum by the due date
  • Set up automatic payments to avoid missing due dates
  • Even one 30-day late payment can hurt significantly
  • Late payments impact your score for up to 7 years

Credit Utilization

30%

The percentage of your available credit that you're using. Lower is better.

Key Points:

  • Keep utilization below 30% for best results
  • Under 10% is ideal for maximum score impact
  • Utilization is calculated for each card and overall
  • Pay down balances before statement closing dates

Length of Credit History

15%

How long you've had credit accounts. Longer history is better.

Key Points:

  • Keep old accounts open, even if unused
  • Avoid closing your oldest credit card
  • Average age of accounts matters
  • New accounts lower your average age

Credit Mix

10%

The variety of credit types you have (cards, loans, mortgage, etc.).

Key Points:

  • Having diverse account types can help
  • Don't open accounts just for mix
  • Installment loans + revolving credit is ideal
  • Not having any credit cards can hurt

New Credit

10%

Recent credit applications and new accounts opened.

Key Points:

  • Each hard inquiry can lower score 5-10 points
  • Multiple inquiries for same loan type count as one
  • Inquiries affect score for 12 months
  • Space out credit applications

The Three Credit Bureaus

Credit bureaus (also called credit reporting agencies) collect and maintain your credit information. There are three major bureaus in the United States:

Experian

The largest credit bureau, tracking over 220 million consumers. Uses FICO and its own proprietary scoring models.

experian.com

Equifax

One of the oldest bureaus, founded in 1899. Tracks over 200 million consumers and 88 million businesses.

equifax.com

TransUnion

Tracks over 200 million consumers. Known for offering credit monitoring and identity protection services.

transunion.com

You're entitled to one free credit report from each bureau every 12 months at AnnualCreditReport.com—the only official source for free reports.

Credit Scoring Models

There are actually many different credit scoring models. Here are the two main ones:

FICO Score

The most widely used scoring model, created by Fair Isaac Corporation. Used by 90% of top lenders. Scores range from 300-850.

Common Versions:

  • • FICO 8 (most common)
  • • FICO 9 (newer)
  • • FICO Auto Score
  • • FICO Bankcard Score

VantageScore

Created jointly by the three major bureaus. Growing in popularity. Also ranges from 300-850.

Common Versions:

  • • VantageScore 3.0
  • • VantageScore 4.0

Why Your Scores May Differ

It's common to have different credit scores, even on the same day. Here's why:

  • Different bureaus, different data: Not all creditors report to all three bureaus. Your Experian report may have accounts your Equifax report doesn't.
  • Different scoring models: FICO 8, FICO 9, and VantageScore all calculate scores differently. The same report can produce different scores.
  • Different timing: Creditors report at different times. A payment you made last week might be on one report but not another.
  • Industry-specific scores: Auto lenders and credit card issuers often use specialized scoring models tailored to their industry.

Ready to Improve Your Credit Score?

Now that you understand how credit scores work, let us help you improve yours. Get a free analysis of your credit report today.

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