Your credit score is a number based on how you’ve repaid debts in the past. The higher it is, the better you look to potential creditors.
Credit scores fall along a scale — usually 300 to 850 — and are designed to estimate how likely you are to repay a loan or credit card as agreed. Your score affects whether you can get approved for credit and sometimes the interest rate or other charges you will pay.
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Scores are calculated from information in your credit reports, which are lists of your past credit activity. This information is compiled by the three big credit reporting agencies: Experian, Equifax and TransUnion. By federal law, you’re entitled to at least one free annual credit report from each agency.
The most commonly used score for lending decisions, produced by Fair Isaac Corp., is called a FICO score. Its chief competitor is VantageScore, jointly developed by the three major credit reporting agencies.
NerdWallet offers a free credit score — the VantageScore 3.0, updated weekly.
If you have a good VantageScore, you’re likely to have a good FICO score. All credit scores consider the same factors, although they may vary slightly on the weight they give each one:
- Your payment history. That includes your record of on-time payments and any “derogatory” marks such as late payments, accounts sent to collections or judgments against you.
- Balances you owe and how much of your available credit you are using, called credit utilization.
- How long you’ve been borrowing money, also known as age of credit history.
- Whether you’ve applied for a lot of credit recently, triggering what are called “hard inquiries” on your credit.
- How many and what kinds of credit accounts you have, such as credit cards, installment debt (such as an auto loan) or a mix.
What goes into a good credit score?
To build your credit score, you want to show good credit habits. The two biggest factors in your score, on-time payments and credit utilization, give you a path to making quick improvements.
- Pay all your bills, not just credit cards, on time. You don’t want a late payment or, worse, a debt collection or judgment against you popping up on your credit reports.
- Keep the balance on each credit card at 30% of your available credit, or lower.
- Get your free credit reports and challenge any errors on them.
Credit scores affect you even if you don’t borrow
You may not plan to borrow money, but even businesses that don’t lend money may check your scores for other reasons. Landlords may use credit scores to decide whether they want you as a tenant. Car insurance companies often charge higher rates to people with poor credit scores.
A great credit score means you’ll qualify for the lowest interest rates on loans and the best credit card terms. You may get to skip making utility deposits. On the other hand, a low score can mean you have fewer choices for loans and cards — and you’ll be putting down those utility deposits. You might pay more for insurance and have trouble finding a place to live.
What a credit score is not
A credit score is not a moral judgment. People can have low credit scores for a variety of reasons, including a medical emergency that came with big bills, identity theft or a collections account they knew nothing about.
A credit score does not by itself indicate how well you’re doing financially. You can bury yourself in debt, but as long as you make the payments on time and aren’t using more than 30% of your available credit, you can have a great score.
A credit score doesn’t consider your income, your savings or how secure your job is.
A credit score doesn’t affect your job prospects. When a potential employer “checks your credit,” the employer sees your credit report, not your credit score.
What if I don’t have a credit score?
Your credit file begins only when your credit history does. So if you’ve never had a credit card or loan, you probably won’t have a score yet. (This is why minors shouldn’t have a credit score; if a child has a credit score, it’s a warning sign of identity theft.)
Also, some people who’ve had scores in the past but haven’t used credit in years can become “credit invisible.” And millions of others are unscorable because of little or no information in their credit files.
If you want credit but can’t get it because of a thin credit file, a secured credit card or a credit-builder loan may help. And some newer scoring formulas now use alternative data, such as cell phone and utility payment records, to help generate scores.
Updated Sept. 9, 2016.