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While many have either heard of or know about credit scores, it’s not a fun subject to tackle for many — leading some to avoid checking their credit scores altogether. A Javelin Strategy and Research study commissioned by TransUnion suggest that more than half of Americans check their credit monthly. This is great news, but other surveys published in recent years indicate a population of Americans that don't know about credit scores.
It’s important to build your credit score and regularly check your credit score to be in good standing. You can qualify for credit cards with valuable rewards and favorable loans when buying a home or car by performing these quality checks.
What Is a Credit Score?
A credit score is a “report card” of your financial history, including your ability to pay debts such as credit cards, car loans, mortgages and any other financial obligations. Your credit score becomes your record that financial institutions use to determine your eligibility for credit lines, home loans and more.
In addition, your credit score can be taken into account when applying for an apartment, when you’re considered for employment and applying for a new bank account.
How Is Your Credit Score Calculated?
Each credit reporting agency calculates and reports your credit score slightly differently. However, there are several core components of having a solid credit score across the board.
As an example, these are the core factors taken into consideration to calculate your credit score for FICO:
Your payment history (35% of your score)
This is the most important part of your credit score as this is made up of your history of making payments on time for your debts. If you make your payments on time, your credit score should reflect your financial responsibility.
Amounts owed (30% of your score)
This is the total debt you have compared to the amount of money issued to you. For example, if you have $100,000 in allocated credit from credit cards and use $5,000, your credit utilization ratio is low, which is a positive factor for your credit score. If you use a significant amount of your credit, that could send your credit score down.
Length of credit history (15% of your score)
All of your accounts are averaged for the length of time you’ve had them. For example, if you have three credit cards for five years, and then apply for a new card, your average length of credit is 12 months (60 months divided by four total cards).
Credit mix (10% of your score)
This is a calculation of the types of loans you have between credit cards, car loan, mortgages, installment loans and more. It’s not necessary to have more than one of each kind.
New credit (10% of your score)
Credit issuers don’t like when consumers apply for credit multiple times in a short period of time. If you’re applying for new credit, try your best to space it out.
This is only one example of one credit reporting agency. While they all slightly differ, they all look at similar data. If one of your scores is excellent, your other scores are likely in good shape.
Difference Between Credit Score, Credit Report and Credit History
There are slight differences in credit score, credit report and credit history. Each term revolves around evaluating your creditworthiness but using different approaches.
What's the Difference?
On a scale of 300-850, this is the numerical value given to you by credit reporting bureaus like Experian, TransUnion and Equifax. The higher your score, the better.
Keep in mind that you have more than one credit score as each agency evaluates you differently.
This is the entire “report card” of your financial history. This typically reflects the last 7-10 years.
This is what banks and lenders will pull to evaluate you for loans or credit.
This is your financial activity, both good and bad, typically from the last seven years. Your credit history includes the details from your credit cards, auto loans and other debts.
Any negative marks on this record can pull your overall credit score down.
Debunking the Top 5 Misconceptions About Your Credit Scores
Because credit scores can be somewhat complicated, many myths have surfaced on how to increase your credit score. Credit report myths such as holding a balance on a credit card or having multiple credit cards on your credit report are not true.
The only tried-and-true way to build your credit is always to pay your debts on time and keep your debt as close to zero as possible.
Here are a few of the most common misconceptions about credit scores and debunking reasons.
Having no balance on your credit cards is bad for your credit.
Some believe that they must have some revolving balance on a credit card to maintain a good credit score. This is not true. In fact, the lower your credit utilization ratio is, the better.
Having too many credit cards is bad for your credit.
Having several credit cards can present challenges like keeping track of all of them, but it doesn’t hurt your credit score.
Checking your credit score will hurt your credit.
You can check your credit score as much or as little as you like, and it will not hurt your score.
Getting a new or better paying job will help your credit score.
While getting a raise or moving to a new company can be an excellent opportunity to build financial gains, this change doesn’t inherently affect your credit score.
It’s hard to fix your credit score.
If your credit score is less than perfect, it may seem difficult to fix your score. However, by understanding the details of your credit report, you can begin to tackle the negative marks holding your score back.
How to Check Your Credit Score
Your credit score is your financial report card that lenders, credit card companies and landlords use to judge how responsible you are regarding paying your debts back. While this score is calculated through many data points, there can sometimes be flaws and mistakes in the reporting that go into the score. A study from Consumer Reports found that one-third of Americans have errors in their reports.
And while you may not need your credit score information daily, it's important to monitor your credit score, so it's up to snuff when needed. Many financial institutions offer free credit monitoring as part of their services, and it only takes a minute or two to sign up.
1. Contact Your Credit Card Provider
If you have a credit card, your servicer likely provides a free credit monitoring platform.
Large credit card issuers like Chase, American Express and Discover all offer credit monitoring to their respective customers.
If you aren’t sure where to find this, take a look inside your customer portal, or give customer service a call.
Credit Card Provider
Type of Credit Score
Bank of America
2. Use a Credit Scoring Service
You may also consider using a credit monitoring service to analyze your credit score. These services are helpful as they can help pair you with home lenders, auto loans, home insurance brokers and identify monitoring tools to help you along your credit score journey.
- Chase Credit Journey: Chase Bank provides this service for free, regardless if you’re a current customer or not. You will be able to get your VantageScore for free, and begin to understand what data is influencing your credit score — both positive and negative.
- Experian Boost: This service, offered by one of the three major credit scoring bureaus, helps consumers count miscellaneous monthly bills toward their credit score such as cell phone bills and streaming services.
- CreditKarma: Known as one of the original tech services to give consumers insight into their credit score, CreditKarma has a full platform of services to help consumers improve their credit history.
3. Get Your Score From a Credit Bureau
You can pull your credit score from three credit bureaus. You can contact Transunion, Equifax or Experian for your score, and they will be able to give you a full breakdown of why your score is where it is.
Here’s how to contact each one:
4. Consult With a Nonprofit Credit Counselor
If you need additional assistance, especially if your credit is less than perfect, you may consider consulting with a nonprofit credit counselor. These counselors can help you settle your debt with creditors and get you on a payment plan that works best for you.
However, know that these counselors tend to come with fees and can hurt your credit score.
What Is a Good Credit Score?
According to Experian, a score of 670-739 is considered a good credit score. This scoring category falls directly in the middle, as the order is: poor, fair, good, very good and excellent.
Having good credit implies that you have demonstrated an ability to pay your debts back, with maybe a blemish or two in the past. However, you may find yourself with less than favorable product options.
For example, you may not be able to be approved for some of the best travel credit cards. However, you should be able to be approved for mid-tier credit cards that still earn decent rewards.
Understanding the Score Ranges: FICO Scores and VantageScore
Credit scores are not all calculated equally, and the two methodologies are FICO and VantageScore. They are similar as they both aim to do one thing: predict the likelihood that someone will fall into delinquency in the next 24 months.
However, the way they each go about measuring their scores is different.
FICO scores are made up of five factors: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%). All of these numbers are considered when calculating your given score from 300-850.
VantageScore is compromised of scores from all three major credit bureaus: Experian, Equifax and TransUnion.
What Is a Good FICO Score?
According to Experian, a FICO score of 670-739 is considered a good credit score. However, remember that your FICO score is measured differently than VantageScore and can vary between the three credit bureaus, although the variance is likely slight.
Here are the credit score ranges according to FICO:
What Is a Good VantageScore?
According to Experian, a VantageScore of 700-749 is considered a good credit score. However, remember that this score can vary between credit reporting agencies as they all have different data sets.
Here are the credit score ranges for VantageScore:
However, there are no "hard barriers" between scores. For example, if you have a 696 VantageScore, it's not guaranteed that you will have a much different outcome than someone with a 703 score. Credit issuers look at scores and where you live, income and other variables.
Top 5 Factors Affecting Your Credit Score
Credit score modeling has been scrutinized for years as no one has been able to develop a perfect way to analyze someone's past financial behavior and create a solid predictor of their financial future.
But regardless of the models, there are several key factors that every credit agency looks for when evaluating you. As long as you take care of these items, you will likely be in good shape.
Are you paying your bills on time? If not, your credit score is likely to take a hit. Do you have any delinquent bills? The answer to that question will also play a significant role in your score.
Credit history length
Are you continuously opening up lines of credit? If so, it’s likely hurting your credit history length. Be sure to hold a few accounts for a long time to build your average credit history.
Credit agencies want to see you have multiple ways of proving your credit history. If you’re paying off credit cards, paying a cell phone bill and paying rent/mortgage, your credit score will be better.
At one point or another, you will likely apply for new credit. Space out these inquiries. If you have several new credit inquiries, it may bring your score down.
Why Is Your Credit Score Important?
Your credit score is vital because this is the financial metric that creditors, employers, landlords and other financial institutions will use to judge how large of a lending risk you are.
A high credit score will give you options to shop around for the best credit card, qualify for the best interest rates for loans and simplify your financial life.
A lower credit score will give you fewer options, including credit cards, loans, housing, and even potentially bank accounts, making it even more difficult to build wealth.
Who Cares About Your Credit Score?
Many agencies and organizations value your credit score. Here are a few of the larger groups that will care:
If your credit is low enough, you may not have access to valuable bank accounts. This is a significant issue as studies show that going unbanked can have large ripple effects on building wealth. This includes auto loans, mortgages, credit cards and more.
If you’re looking to rent and apply for a lease, landlords will likely check your credit. And if your credit is too low, you may find that you have fewer housing options available to you.
Your future employer
Some employers, while not all, may want to consider your credit score. While your financial health isn’t of concern to them, they’re looking to see if you’re responsible.
Benefits of Having a Good or Excellent Credit Score
Having a good or excellent credit score opens up many options for the best financial products. Whether it's a solid rewards credit card, a low fixed-rate credit score, a low rate on an auto loan or even better housing options — a solid credit score is necessary. However, it takes time to build a good credit score, especially for students. It can take months, or even years, to accumulate enough on-time payments and positive marks to swing your credit in a positive direction.
Generally, here’s what you can expect with good or excellent credit:
Being approved for the best credit cards
With a solid credit score, you can be approved for cards that earn substantial cash back or travel rewards. With a poor credit score, you’ll likely be limited to secured cards and even possibly not have access to credit at all.
Buying a car on credit
With good credit, you have a solid chance of approaching a car dealership, credit union or other financial institution and getting approved for a car loan. However, you may not have that option with bad credit and may be forced to pay with cash.
Having more housing options
With a poor credit score, housing options will be limited. You will likely have several options with a solid credit score, including renting or purchasing a property.
Having access to capital
If you’re looking to go back to school, invest in real estate or even start a business, you will need money. Whether through a personal loan, a line of credit or a business loan, a solid credit score is necessary to access the funds required.
How to Improve Your Credit Score
Improving your credit score can be a journey, but it’s worth the investment. By having a solid credit score, you will have access to more financial opportunities such as valuable rewards credit cards, the ability to use capital to invest in a business or real estate and more.
The most challenging part is taking the first step to finding out what your credit score is and identifying the blemishes that are dragging your score down.
Analyze your credit history
Pull your credit report and find out the negative marks. Whether it's a late payment on a credit card or student loan, find out precisely what is hurting your credit score.
Contact the lenders
Creditors are not out to get you despite what some believe. Simply put, they want their debts paid back. And by calling them, you may be able to negotiate the negative mark by paying back some of the debt through a repayment plan.
Pay down credit card debt
A large part of your credit score is the amounts owed. If you owe several debts, such as credit card debt, try your best to pay down those debts. If the interest is piling on, you may consider applying for a personal loan to consolidate your debt. And, if you still find it challenging to pay your debts, you may consider debt counseling to pay a portion of the debts back.
Ensure your rent and other monthly bills are factored in
It’s likely you pay monthly bills such as insurance, rent and streaming services like Netflix. Currently, most credit servicers don’t count these bills. However, if you use Experian Boost, you can quickly gain ‘credit’ for those monthly bills.
Have someone add you as an authorized user
If you have a trusted family member or friend with good or excellent credit, you may consider asking them to add you as an additional user to their credit card. By doing so, you’ll receive ‘credit’ for their on-time payments each month. In addition, it will improve your credit utilization ratio.
Expert Insight on Credit Scores
MoneyGeek interviewed two credit experts to provide expert insight on how consumers can improve and master their credit scores.
- What is the largest consumer misconception when it comes to credit scores?
- What is the largest advantage of having a good to excellent credit score?
- Give one quick tip for readers who want to improve their credit score.
CFP®, Financial Advisor at Bloom Advisors
Founder & CEO of Reason
Certified Educator in Personal Finance & Founder of Cleancutfinance.com
If you're looking for resources to help jumpstart your personal finance journey, particularly improving your credit score, there are many places to start. Pull what's beneficial to you from MoneyGeek's compiled list of websites and tools to help you get started with your journey to improving your credit score.
- Consumer Finance Protection Bureau: This is the government agency responsible for implementing and enforcing Federal laws around consumer financial products. You can find resources if you are in a difficult situation with a lender.
- Federal Deposit Insurance Corporation: This Federal agency was designed by Congress to maintain stability and confidence from the public in the financial system. They also have resources for consumers trying to be better with their money.
- Y4Y (You for Youth): You for Youth is a government-funded group with the mission of supporting young people with resources for a better future. But regardless of age, you may find this resource helpful.
- National Endowment for Financial Education: This non-profit organization is dedicated to giving all people more resources to gain financial literacy.
- New York Public Library: Whether you are a member of the NYPL or not, there are many resources available. Whether you’re interested in investing, paying for college, real estate or building your credit score, there are resource guides that outline the basics.
- Financial Literacy and Education Commission: The FLEC is an arm of the U.S. Treasury Department in charge of building MyMoney.gov, a resource for educators and consumers to have more tools to manage their budgets.
- Notre Dame Personal Finance Resources: Notre Dame has a wealth of resources on their website, not only for its students.
- America Saves: This is a great resource for those who aim to save more money each month. Founded by the Consumer Federation of America, it seeks to help Americans save more, reduce debt and build wealth.
About Brett Holzhauer
- American Express. "My Credit Guide." Accessed May 26, 2022.
- Bank of America. "Get Your FICO Score." Accessed May 26, 2022.
- Capital One. "CreditWise from Capital One." Accessed May 26, 2022.
- Chase. "Chase Credit Journey." Accessed May 26, 2022.
- Consumer Federation of America. "Annual Survey Reveals That Low-Income Consumers Are Most Likely To Seek Credit yet Know the Least about Credit Scores." Accessed June 7, 2022.
- Consumer Reports. "More Than a Third of Volunteers in a Consumer Reports Study Found Errors in Their Credit Reports." Accessed May 17, 2022.
- Experian. "What Is a VantageScore Credit Score?." Accessed May 18, 2022.
- Experian. "What Is the Average Credit Score in the U.S.?." Accessed May 18, 2022.
- Experian. "What Is a Good Credit Score?." Accessed May 18, 2022.
- TransUnion. "Banks and Credit Unions Usher in Era of Personal Financial Empowerment as Consumer Credit Scores Become Even More Accessible." Accessed June 7, 2022.
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