What is a credit score?

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• Your credit score quantifies your creditworthiness to lenders based on your credit history.
• Credit scores from the two main credit scoring models, VantageScore and FICO, range from 300 to 850.
• A good FICO credit score is 670 or more, while a good VantageScore credit score starts at 661.

Your credit score plays a pivotal role in your financial life, affecting everything from applying for an apartment lease to buying a house or financing a car. Some employers even use them to help decide whether or not to offer you a job.

Because they have such a big impact in so many areas, it's important to understand credit scores, how they're calculated, and how to improve them.

What is a credit score?

Credit scores are a numeric representation of your credit reports, documents containing information on your credit activity compiled by the three credit bureaus — Experian, Equifax, and TransUnion.

Scores range from 300 to 850, though credit scores rarely get as low as 300. According to FICO, only 2.9% of consumers had a credit score below 499 as of April 2022.

Your credit score signals to lenders how trustworthy you are as a borrower. The higher the score, the more creditworthy you are. People who have high credit scores get better rates when they borrow money because lenders see them as a safer investment. 

As a representation of your credit report, credit scores are regularly updated to reflect any new information on your credit report. If you fill your credit report with positive information, your credit score will increase. On the other hand, negative information, such as late payments or high levels of debt, will cause your credit score to drop.

There are a handful of credit scoring models, though the two most commonly used are FICO and VantageScore. The most significant difference between these scoring models is how they calculate credit scores based on your credit information and what constitutes a good credit score.

What are the credit score ranges?

Both VantageScore and FICO divide the full range of possible credit scores into five sections, which are as follows:

What's considered a "good" credit score differs based on what scoring model you look at. A good credit score for FICO is anything above 670, while a good VantageScore starts at 661. 

"A good credit score, in my mind, is any credit score that gets you approved with the lenders' best deal," says John Ulzheimer, a credit expert and former FICO employee, says, 

These vary by industry. A 720 will get you the most favorable rates for auto loans, while a 760 is a good credit score for mortgage lending.

Just because you don't have a stellar credit score doesn't mean you can't borrow money. However, the rates you can qualify for improve as your credit score rises.

How are credit scores calculated?

FICO and VantageScore calculate your credit scores using your credit report. They target specific pieces of information to best predict your risk level as a borrower

The exact algorithm that FICO and VantageScore use isn't publicly available. However, we have a general breakdown of how FICO and VantageScore calculate credit scores.

Let's unpack these sections:

Payment history: Payment history refers to how reliably you've settled your outstanding balances. This category is simplest but most impactful for both FICO and VantageScore. A bad payment history may contain multiple delinquencies, payments sent to debt collections, or even bankruptcy. 

Credit balance: Also known as amounts owed, this category tracks your level of debt as it is a good indicator of your credit performance in the future. In simple terms, the more money you borrow, the less likely you are to pay it back. This includes total balances as well as your credit utilization ratio, which measures the amount of credit you're using out of the total credit available to you particularly when it comes to revolving credit.

FICO bundles total balances and credit utilization under one category, while VantageScore separates them into separate categories. 

Length and type of credit: Length of credit history measures the average age of your accounts and the age of your oldest and newest accounts. The older your credit accounts are, the better your score will be. That's why keeping your older credit cards open is often beneficial, even if you don't use them frequently. 

The type of credit looks at the diversity of your open credit accounts. Successfully paying off multiple types of credit shows you're good at juggling these debts. Ergo, you're more creditworthy.

While VantageScore bundles these two categories into one, FICO considers credit types separately from length. 

New credit: This looks at any new lines of credit you're taking out, quantified by the hard inquiries on your credit report. One hard inquiry may drop your score a few points, but many recently opened lines of credit will severely dent your credit score. This is because each new line of credit increases the chance that you won't be able to juggle all those accounts successfully. Creditors may also wonder why you're suddenly opening several credit accounts.

Available credit: Available credit is very similar to credit utilization in that it looks at the total credit you still have available on your revolving credit accounts. Available credit is a small part of your overall credit score and is only singled out by VantageScore.

VantageScore 4.0 and FICO 10T

VantageScore and FICO occasionally release updated credit scoring models in an effort to more accurately predict consumer behavior. VantageScore 4.0 and FICO 10T are the two most recent credit scoring models, released in 2017 and 2020, respectively.

The newest versions use your balances over the last 24 months in their calculations. The thought is that trends in your credit balances over this period indicate where your balances will be in the future. For example, if your debt has risen steadily over the last 24 months, your balance will likely continue to rise next month.

These credit scores have yet to see wide adoption, though Freddie Mac and Fannie Mae have required mortgage lenders to use VantageScore 4.0 and FICO 10T when available. 

How to build credit 

Credit scores have steadily risen over the last two decades. The average credit score in October 2005 was 688. As of April 2023, the average FICO credit score is 714.

Ulzheimer attributes the rise in average credit scores partially to the amount of information now available on credit scores (case in point, the article you're reading at this very moment).

"How you earn and maintain your credit score was, 30 years ago, kind of a secret because no one really knew what a credit score was," he says.

With what we know about credit scores, the most effective way to maximize your credit score is to build a positive payment history. If you already have a credit card, this means making all your payments on time. If you've never taken out a line of credit, this means looking into a credit-builder account that doesn't require a prior credit history. You can find our guide on the best credit-builder accounts here.

Even if you've established a credit history and have a credit score, there are ways to add to your payment history. Rent payments, which normally aren't included in your credit report or credit score, can be added to your payment history through a rent reporting service. Some of the best rent reporting services can also add your utility bills to your credit report.

You can also build credit by getting someone you trust to add you to their credit card as an authorized user. The cardholder is responsible for any charges you make, and any payments the cardholder makes (or misses) end up on your credit report. This is a popular way for parents to build credit for their children.

As we better understand what makes a credit score tick, climbing up the credit ladder seems a little less daunting. The percentage of consumers with a 700 credit score or higher is 46.9% as of April 2022, up 10.3% since 2005. 

Joining this group may seem far away, especially if you're just starting your credit history now. However, it's easier to build credit from scratch than to rebuild your credit from a low credit score. "There's almost like a blank sheet of paper," Ulzheimer says. "And you're choosing what to put on that sheet of paper."

How to check your credit score

Checking your credit score for free is easy if you know where to look. A financial institution you already have an account with, such as a bank or a credit card company, may offer their customers free credit scores. It's worth checking with your existing accounts, such as a credit card or bank, before looking for other services. 

If none of your accounts offer your credit score, many of the best credit monitoring services are free. "If anyone's buying a credit report or credit score these days, they're simply not shopping around because there's tons of places where you can get that stuff for no cost," Ulzheimer says. 

Tread lightly with these services, and read the fine print. You will want to know exactly what you're signing up for when your credit history is involved.

Why is your credit score important?

Even if you don't plan on getting a new credit card or applying for a loan anytime soon, your credit score still has an impact outside of borrowing money. For example, insurance companies also consider your credit score and credit history when they decide who they insure and how much they will charge to cover you. This is called a credit-based insurance score.  

Landlords may look at your credit score as an indication of financial responsibility when considering your apartment rental application. A history of late payments may indicate to them how likely you are to make rent on time. 

Your credit score can also impact your current credit cards, specifically your credit limit. If you have been paying off your credit card consistently and you're maintaining a good credit score, you can ask your credit card company to increase your credit limit. You can also ask for lower interest rates on your credit card, making borrowing money cheaper.

Credit scores frequently asked questions

How do you get a credit score?

You can establish a credit score using a credit-builder account, which doesn't require a credit score to qualify. You'll need to establish roughly three to six months of credit history before you receive a credit score.

Why do I have multiple credit scores?

Your credit scores will vary slightly based on which credit scoring model you're looking at and which credit bureau is supplying your credit report. If one credit score is very different from your other credit scores, request to see a free credit report, as you may need to dispute an error on your credit report.

What hurts my credit score?

Keeping a high credit utilization ratio, anything above 30%, and missing credit payments will hurt your credit. Opening too many credit accounts will also significantly lower your credit score.