What is a Credit Score?

Your credit score has a big impact on your ability to borrow money and how much that money will cost you.

What’s a Credit Score?

A credit score is a measurement of creditworthiness and credit history. Lenders and other financial institutions use this number to estimate the likelihood that someone will pay back what they borrow. A credit score can fall anywhere between 300 and 850. It’s important to recognize that you don’t have just one score. There are multiple credit bureaus (the companies that collect information about credit and send it to lenders) that use slightly different methods to determine your credit score.

The Good, the Bad, and the In-Between

The closer your score is to 850, the easier it will be to get loans or cards at better rates. A high score is often referred to as “good credit”, while a low score is referred to as “bad credit.” Credit scores are always in flux, and you can make adjustments to bring yours up if it isn’t where you want it to be. To get an idea of how credit scores are perceived by lenders, here’s a general scale from Equifax, one of the major credit bureaus:

• 300-579: Poor
• 580-669: Fair
• 670-739: Good
• 740-799: Very good
• 800-850: Excellent

What’s in a Score

Credit bureaus determine your score by taking various aspects of your financial and borrowing history and converting them to a number. Some aspects have a heavier impact than others. Let’s look at how FICO—whose scores are among the most commonly used—breaks everything out:

• 35% – Payment History: Whether you’ve paid back what you borrowed and if you did so on time.
• 30% – Amount Owed: How much debt you have and your credit utilization ratio—how much of your available credit you’re actually using. Essentially, if you have a lot of accounts that you’re borrowing a lot from, it can have a negative impact on your score.
• 15% – Length of Credit History: How long your accounts have been open and active. The longer your history (as long as that history is positive), the better.
• 10% – Credit Mix: How well you can juggle different types of credit, such as credit cards, loans, store cards, etc.
• 10% – New Credit: How recently you applied for new credit. Opening a lot of accounts in a short amount of time is seen as risky for lenders.

Checking Your Credit

Many credit card companies and financial institutions include your score on their app, website, or your statement. If your institution doesn’t offer such a feature, your other options are to go through a non-profit counselor, use a credit score service, or purchase your score from one of the bureaus. To learn more about each of these options, check this page from the Consumer Financial Protection Bureau.

You’ve likely heard that you can get a free credit report from each bureau every year. This report includes a list of your accounts and a history of your credit use, but it does not include your credit score.

Hard vs Soft Inquiry

Many people think that checking their score themselves will lower it. This isn’t true, but it does create a soft inquiry. A soft inquiry is a record that you, or someone you gave permission to, checked your credit. A hard inquiry, on the other hand, is when a potential lender requests to review your score in the process of applying for credit from them. Hard inquiries impact your credit score for around 12-24 months, but the impact is usually fairly small. Because of this, it’s best to avoid too many hard inquiries in a short timeframe.