Credit Scores 101: What Affects Them, What Doesn’t, and How to Improve Them

Key Takeaways

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• A credit score is a three-digit number between 300 and 850 that lenders use to decide if you qualify for a loan, mortgage, or credit card. A score of 670 or higher is generally considered good, and 800 or above is excellent.
• Your score is based on five factors: payment history (35%), amounts owed (30%), length of credit history (15%), credit mix (10%), and new credit (10%).
• Paying your bills on time and keeping your credit utilization below 30% make the biggest difference to your score.
• To improve your score, keep old credit cards open, ask for a higher credit limit, and check your free annual credit reports from AnnualCreditReport.com for errors.

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A credit score is a three-digit number that can significantly impact your financial life. Lenders use it to decide your creditworthiness and ability to obtain a loan, mortgage, or credit card.

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The model was created by The Fair Isaac Corp., now known as FICO, and a credit score ranges from 300 to 850. The higher your score, the more are your chances to get approved for a loan and even get better interest rates.

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What is a Good Credit Score?

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Anything above 670 or higher is considered a good credit score by lenders. Anything above 800 and you are in the excellent category. Here are general ranges for credit scores, though they might differ slightly from lender to lender:

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

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How is a Credit Score Calculated

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There are 3 major credit reporting agencies in the U.S. (Equifax, Experian, and TransUnion) that constantly report, update, and store consumers’ credit histories, which include active accounts, total debt levels, and repayment history. When calculating a credit score, these factors play a major role. Here’s a list of all the factors and the extent to which they impact the credit score:

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1. Payment history (35%): It shows whether you pay your bills on time, how many payments you’ve missed, and how late they were.
2. Amounts owed (30%): This is how much of your available credit you’re actually using, also known as credit utilization. Keep it under 30%, and your score will thank you.
3. Length of credit history (15%): The longer your credit history, the better. Lenders have more data on how you handle payments, so they see you as less of a risk.
4. Credit mix (10%): Lenders like to see that you can handle different kinds of credit. This includes installment credit like car loans and mortgages, and revolving credit like credit cards.
5. New credit (10%): Applying for a lot of credit in a short time can hurt your score.

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How Your Credit Score Impacts You

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Your credit score affects more than whether you can borrow money. Lenders, landlords, and service providers may check your credit when you:

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• Apply for a credit card, personal loan, or auto loan
• Take out a mortgage or refinance your home
• Rent an apartment
• Set up utilities like electricity, gas, or water. A low score could mean paying a large security deposit.
• Sign up for a cellphone plan

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A higher score can help you get approved and qualify for lower interest rates, which can save you thousands of dollars over the life of a loan.

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How long it takes to improve your score depends on what’s pulling it down. Some changes work quickly. If you pay down a high credit card balance, your credit utilization drops, and your score can improve as soon as your card issuer reports the new balance to the credit bureaus, usually within a month or two.

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How to Improve Your Credit Score

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The factors that decide your credit score are also the ones that you can work on to improve your score.

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1. If you pay your credit obligations like credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans on time for six months, you would see a noticeable difference in your score.
2. If you have been paying your bills on time, you can ask your bank for an increase in your credit limit. This can help you reduce your credit utilization and improve your score.
3. If you are not using a card anymore, just stop using it, but keep the account open. Depending on the card’s age and credit limit, closing it can hurt your score. Your card issuer may close the account after several months of inactivity. The timeline varies by issuer.
4. Avoid unnecessary “hard” credit pulls. A hard pull, also called a hard inquiry, happens when a lender checks your credit report after you apply for a credit card, loan, or mortgage. A single inquiry usually lowers your FICO score by fewer than five points, and the impact often fades within a few months. It can affect your FICO score for up to 12 months, though it stays on your credit report for two years. Only apply for credit you need, and remember that checking your own credit score is a “soft” inquiry that won’t lower it.
5. You can get one free credit report every year from each of the three main credit bureaus through AnnualCreditReport.com, or you may be able to check your credit for free through your bank. Go through your credit report 2-4 times a year and get any mistakes fixed. You can also sign up for a monitoring service to keep your information safe.

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