Like it or not, your credit score is an important number. It often dictates what you can and can’t afford to purchase.

You’re probably already aware that credit scores exist, but do you know how they are calculated? Do you know what your credit score is?

Don’t bury your head in the sand. Read on to learn more about what makes up your credit score and steps you can take to improve it.

What Is a Credit Score?

Your credit score is a three-digit number designed to represent your credit risk to potential lenders.

Credit scores range from 300 to 850.

Low or poor credit scores make it harder for you to get a loan or credit card. If you do get either, your interest rate will probably be high.

High or good credit scores allow you to qualify for better loans and credit cards with lower interest rates and more favorable terms.

Your credit score is based on information inside your credit report. Credit bureaus, also known as credit reporting agencies, compile data into your credit reports, including information about your borrowing and repayment history.

There are three credit bureaus:

Credit reporting agencies maintain your credit reports — but they do not calculate credit scores. Instead, different companies use their own credit scoring systems to calculate your score.

What Is a Credit Scoring Model?

Your credit score can vary depending on the credit scoring model used to calculate it.

There are two main credit scoring models in the U.S.:

  • FICO: The most established and widely used credit score model. It’s been around since 1989.
  • VantageScore: Started in 2006 as an attempt to introduce some competition for FICO and ensure credit reports and scores were calculated fairly.

Both FICO and VantageScore pull from the same data, but each credit scoring company weighs the information slightly differently.

There are also five other specialized and lesser-used credit scoring models:

  • TransRisk
  • National Equivalency
  • Credit Xpert
  • CE credit scores
  • Insurance credit scores

Your CE credit score is used by Quicken Loans and is provided for free at Quizzle. Insurance credit scores can affect your insurance premiums.

But you can’t control which credit score model is used when you apply for a new card or loan. Therefore, the best tool in your arsenal is being smart with your finances and avoiding things like late payments and collections.

Understanding FICO Credit Scores

Your FICO credit score consists of a number ranging from 300 to 850. A score of 600 or lower is considered poor, while a score of 750 or higher is considered excellent. The higher you can get your number, the better.

What Goes into Calculating Your FICO Score?

Your FICO credit score is calculated using five main factors. Each factor carries a certain weight, with some more important than others to your overall score.

Payment History

When calculating your credit score, FICO looks at your payment history. If you make them on time, you’ll be seen as more favorable to lenders and, therefore, have a better credit score.

But if you have lots of late or missed payments, your credit score will suffer, and you’ll have fewer options available when it comes to borrowing.

Payment history accounts for 35% of your credit score.

Credit Utilization

Just because you have available credit doesn’t mean you should max out your credit cards.

Your credit utilization, which tells FICO how much of your available credit limits you’re using, shows whether you are sensible with your borrowing.

Keeping your credit utilization rate at or under 30% is good. Under 10% is ideal. That means you wouldn’t want your balance to exceed $3,000 on a card with a $10,000 credit limit.

Credit utilization accounts for 30% of your credit score.

Length of Credit History

The length of your credit history shows how you’ve borrowed over time. If you haven’t had credit cards or loans in your name for long and are just beginning to build your credit history, you’ll likely have a lower score.

As you add credit cards and increase your limits (while paying on time and using your available credit sensibly), your history lengthens and your score should go up.

Credit history accounts for 15% of your credit score.

New Credit

New credit can be good or bad for your score. If you open a bunch of new credit card accounts at once, this tells lenders you’re being irresponsible, and your credit score will dip.

But opening a new credit card occasionally can actually help boost your score. That’s because adding a new card and keeping a low balance can lower your overall credit utilization.

New credit accounts for 10% of your credit score.

Credit Mix

It’s good to have a mix of credit to your name. This means not just relying on credit cards to build your credit, but also installment loans like car loans or a mortgage.

While this factor doesn’t make or break your credit scores, a good mix shows lenders that you are responsible at managing different types of debt — as long as you’re making timely payments.

Credit mix accounts for 10% of your credit score.

What Makes Up VantageScore Credit Scores?

Like your FICO score, your VantageScore can range from 300 to 850. It includes similar factors as your FICO score, but with different weights given to each factor:

Unlike FICO, VantageScore takes into account your total balances, which includes all credit to your name (credit cards, auto loans, mortgage loans, etc).

VantageScore also ignores collections, whereas FICO identifies them in your credit report and takes them into account when calculating your score.

And while FICO is more widely used, free credit checking companies like Credit Karma often use VantageScore.

Why Are Credit Scores Important?

Whenever you apply for a loan or credit card of any kind, the lender will look at your credit score.

  • Loan availability: A poor credit score will shut many doors when it comes to borrowing, as many lenders will not be willing to take a chance on you.
  • High interest rates: Your loan will have a higher interest rate, which pushes up your monthly payment.
  • Low credit limits: Credit card companies view you as a bigger risk, so your credit limit on a card will be lower.

If you want to get a better rate on credit cards and loans, you’ll need to put some work into improving your credit score.

How to Improve Your Credit Score

With some hard work and determination, you can boost your credit score as long as you know where your weaknesses lie and where you need to improve.

Pay Bills on Time

The best thing you can do to improve your credit score is to make on-time payments. That might mean sitting down and looking at your finances to figure out when to schedule payments for things like utilities and loans.

If you have a hard time remembering payment deadlines, look into automatic withdrawals or set up recurring reminders on your phone to avoid accidental nonpayment.

Pro Tip

An app focused on building credit can help raise your credit score. Through small loans or recurring bills, these six apps give your credit score and history a boost.

Pay Down Balances

Once you have your payments under control, make a plan to pay down your credit card debt to lower your credit utilization ratio.

Start with high-balance credit cards and try to get them at or below 30%. Bear in mind that cards with a higher interest rate will incur more charges if you don’t pay them off in full each month, so aim to reduce the balances on these cards first to lower your overall monthly payments.

Ideally, you should get to a place where you can pay off your cards entirely each month, though that is difficult for many people.

Mix Up Your Credit

If you already have a good credit score and want to improve it even more, look into mixing up the types of credit to your name.

Maybe you could take out a loan for your next car or become a homeowner with a mortgage rather than a renter.

What you don’t want to do is start applying for new types of credit if you don’t need them; this can work against you (and your good credit score), even if you’re trying to do the opposite.

Don’t Be Afraid to Check

It’s a myth that checking your credit score lowers it. In the world of credit, there are two types of inquiries: hard and soft.

  • A hard credit inquiry happens when a bank or other lender runs your credit to see whether they should lend to you. This can hurt your credit score, especially if you receive a lot of hard inquiries in a short amount of time.
  • A soft credit inquiry happens when you check your own credit report. This is not detrimental to your credit score.

Many financial institutions and credit card issuers offer free credit checks to customers. Or you can try a credit monitoring service, like Credit Karma, to keep tabs on your credit score.

You can also get a free credit report from each of the three bureaus once every 12 months at AnnualCreditReport.com.

Your credit score is important if you want to borrow money without incurring high fees or interest rates. Learning about what factors determine your score helps you know how to improve it, which will open the door to better terms and rates in the future.

More Credit Score Resources

How to Raise Your Credit Score

Credit Score Factors

What is a Good Credit Score

FICO Score vs. Credit Score

Catherine Hiles lives in Ohio with her husband and their two children. By day, she manages a team of writers and graphic designers, and she catches up on her own writing in her spare time.

Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.

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