Your credit score uses how you’ve handled debt in the past to predict your likelihood of repaying a future loan or credit card balance.
Credit scores fall along a scale, usually 300 to 850. The higher your score, the better you look to potential creditors. Your score affects whether you get approved for credit and sometimes the interest rate or other charges you’ll pay.
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Scores are calculated from information in your credit reports, which list your past credit activity as compiled by the three big credit reporting agencies: Experian, Equifax and TransUnion.
What goes into a credit score?
Two companies dominate credit scoring in the U.S.: FICO and VantageScore. FICO originated automated credit scoring, while VantageScore was more recently developed by the three major credit reporting agencies.
If you have a good VantageScore, you’re likely to have a good FICO score, as both consider the same factors:
- Payment history: your record of on-time payments and any “derogatory” marks, such as late payments, accounts sent to collections or judgments against you.
- Credit utilization: balances you owe and how much of your available credit you’re using.
- Age of credit history: how long you’ve been borrowing money.
- Applications: whether you’ve applied for a lot of credit recently.
- Type of credit: how many and what kinds of credit accounts you have, such as credit cards, installment debt — including mortgage and car loans — or a mix.
What builds a good credit score?
The two biggest factors in your score — payment history and credit utilization — give you a path to build your credit score:
- Pay all your bills, not just credit cards, on time. You don’t want late payments or worse, a debt collection or legal judgment against you, on your credit reports.
- Keep the balance on each credit card at 30% of your available credit or lower.
- Get your free credit report and challenge any errors you find.
Credit scores matter even if you don’t borrow
Having an excellent credit score means you’ll qualify for the lowest interest rates on loans and the best credit card terms. A poor credit score might mean you don’t qualify for a loan or card at all.
What credit scores don’t do
A credit score doesn’t indicate how well you’re doing financially. You can bury yourself in debt but still have a great score as long as you pay on time and don’t use more than 30% of your limit.
It also doesn’t consider your income, savings or job security.
And a credit score doesn’t affect your job prospects. A potential employer that “checks your credit” sees your credit report, not your score.
What if I don’t have a credit score?
If you’ve never had a credit card or loan, you probably won’t have a score. And people who haven’t used credit in years can become “credit invisible.”
You are likely to have a VantageScore before you have a FICO. That’s because VantageScore uses alternative data —such as rent or utility payments, if they’re reported to the bureaus — and looks back 24 months for activity. FICO 8, the most widely used version, looks back only six months and doesn’t use alternative data.
Updated Oct. 27, 2016.