Your credit score is one of the most important numbers in your financial life. It can affect your ability to buy a home, get a loan, secure a credit card or even rent an apartment. Understanding how your credit score works – and how to improve it – can help you make smarter financial decisions.
Why your credit score matters
Your credit score (also called your FICO score) represents how likely you are to repay borrowed money.
Lenders, landlords and other organizations use it to evaluate risk. A higher score generally means you’re seen as a less risky investment and are likely to get better interest rates and offers on loans. A low score can make borrowing more difficult – and more expensive.
What is a good credit score range?
A credit score can range from 300 to 850. Each of the three major credit bureaus (TransUnion®, Equifax® and Experian®) has slightly different criteria for what makes excellent, okay or bad credit. But on average the ranges are as follows:
- 750+: Excellent credit
- 700-749: Good credit
- 650-699: Fair credit
- 600-649: Poor credit
- Below 600: Bad credit
Higher scores signal lower risk to lenders, while lower scores may limit your options.
How is my credit score calculated?
There are five categories, with various weights, that decide your credit score.
1. Payment history (35%)
Your history of paying bills on time has the biggest impact. Have you been consistently late paying bills? Are debt collectors after you? This has a large impact on your good credit score.
2. Amount owed (30%)
What is your current amount of debt? How does that compare to your credit limits? This ratio is important – you don’t want the amount you owe to be close to how much you can borrow. Aim for less than 30 percent and definitely don’t go over 50 percent.
3. Length of credit history (15%)
The longer you have had credit cards or other types of credit accounts, the better.
4. New credit (10%)
Are you constantly applying for new lines of credit? That will negatively impact your score. If you are applying for loans, it’s smart to shop around, but don’t start applying for several credit cards a month or you will see your score take a dive.
5. Types of credit used (10%)
People who have different types of credit (credit cards versus a mortgage or other “installment” loans like car payments) are less of a risk to lenders as those with only one type of credit – as long as you’re making those payments on time.
How does my credit score affect loan costs?
Say, for example, you want to buy a home. Your credit score doesn’t just determine approval – it also impacts interest rates. Higher scores often qualify for lower rates, and lower rates reduce your monthly payments. Over time, this can save – or cost – you thousands of dollars. Even small differences in your score can impact how much you pay over the life of a loan.
How do I check my credit score?
You can get a free credit report every year from each of the major credit bureaus — Equifax, Experian and TransUnion — by visiting www.annualcreditreport.com. This is the only website for free credit reports authorized by the federal government. You may have a different score with each, so you’ll want to get reports from all three bureaus – you can get them all at once or spread them out (e.g., get one from Equifax in January, Experian in May and TransUnion in September).
Many banks, financial institutions and credit cards now also have services that will provide your FICO score. There are also many sites online that provide credit reports — like the ones you see in TV commercials — but be wary of using third-party companies that require your credit card information.
How often should I check my credit score?
The recommended time frame to check your credit report is one to two times every year. However, it’s a good idea to check it more frequently if you have a credit card that provides you with a free FICO score. Additionally, you might want to take advantage of the fact that you can get one free report every year from the major bureaus and stagger those every four months to check. Regular checks can help you catch errors or fraud early, track your progress and stay informed about your financial health.
Will checking my credit hurt my score?
It all depends on the company you use, the type of application you submit and several other factors. When you check your report yourself, like through your bank’s app, no points are deducted. However, when a company issues a hard inquiry, which is a check usually done by a financial institution, it might take anywhere from three to five points off your score. Soft inquiries, usually done for background checks, do not have any effect. Additionally, too many applications at one time can also remove more than a few points.
Take control of your credit
Your credit score plays a major role in your financial opportunities. Start by paying your bills on time, keeping balances low and doing regular credit checks. Over time, these actions can help you build a strong credit profile and improve your financial future.