What Is a Credit Score?

Certainly, you’ve heard the words “credit score” mentioned in conversation or media. But what do they mean and how can they affect you? Below is an overview of what a credit score is and how to help make it work for you.

Credit Score, Defined

A credit score predicts how likely you are to pay back a loan on time. It is derived from a mathematical formula based on information in your credit report.

Your credit score may impact getting a credit card, banking account, mortgage, or other types of loans. If you are offered a loan, your score could factor into how much money you can borrow and at what interest rate. It could even determine if a landlord will rent to you. This is because if a lender or landlord is letting you borrow – money or a home – they want to know you’re likely to pay them back.

Credit Reports

There are three main credit reporting agencies in the U.S.: Experian, TransUnion, and Equifax. Each of these credit reporting agencies offer credit scores and a credit report that shows your credit activity and history. Don’t be surprised if they differ slightly from each other. They will be similar, but factors like information used for calculation, scoring models, and sometimes the specific day can make scores different.

Federal law allows you to get a free copy of your credit report from each credit reporting agency every 12 months. Request by:

• Visiting AnnualCreditReport.com
• Calling 1-877-322-8228

Credit Score Ranges

There are several types of scoring models, but the most popular ones you may have heard of are FICO®and VantageScore®. Each model has its own specific range with the highest numbers representing the best credit and the lowest numbers representing the poorest credit. In general scores will be classified as:

• Poor
• Fair
• Good
• Very Good
• Excellent

Impacts on Your Credit Score

Several factors in your credit report may impact your credit score and can bring it up or down.

• Bill payment history – Models consider open credit accounts, late or missed payments, and bankruptcy filings. Consistent, on time payments will generally show in your favor.
• Debt-to-credit ratio – AKA credit utilization rate or your credit amount used vs. your total credit available. Generally, this is in terms of revolving credit like credit cards and lines of credit.
• Credit mix – What types of credit do you hold?
• Length of credit history – Having a long history of credit may work to your advantage. If you’re just starting or have had decades of experience, your oldest account, newest account, and the average age of all your accounts may be calculated into a credit score model.
• New credit – Applying for or opening new credit accounts also may impact your score.

How to Build Your Credit Score

It’s a good idea to understand what may influence your credit score and know what is on your credit report. Here are some tips to improve your credit score and keep it in good standing.

• Make payments on time – This should be at the top of your to-do’s. Make it happen by setting up autopay or calendar alerts. If you know you’re going to have trouble making a payment, reach out to the company to establish communication and a possible payment plan.
• Pay down debt – Remember the debt-to-credit ratio? Try paying down your revolving credit debt to decrease your debt and increase your available credit.
• Limit new applications – When you’re trying to build credit, try to take it slowly. Even if you have a longer credit history, be a bit choosey about what accounts you open.
• Review credit reports – Not only review them but if you find anything that is incorrect or suspicious, report it to the credit reporting agency whose report has the error and keep track of the process. Experian, TransUnion, and Equifax have specific procedures for disputes.

All in the Numbers

By knowing what goes into the numbers of your credit score, you can be prepared to prevent some negative impacts, create good habits to build up your score and protect your credit with helpful resources.