What is a Credit Score? (and why it matters)

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If you think your bank account balance is the only number that matters when it comes to personal finance, think again. Your credit score is a three-digit number that can have a big impact on your financial life.

A credit score is a ranking of your creditworthiness, and lenders and creditors can look at this number to determine how likely you are to repay a loan on time. Credit scores range between 300 and 850, and are given by the top three credit bureaus, Equifax, Experian, and TransUnion.

We’ll cover the details of how your credit score works, how it is used, and how you can check yours (for free).

Key Takeaways

  • Credit scores are numbers designed to rate how reliable you are in terms of repaying a loan on time
  • Equifax, Experian, and TransUnion are three different credit bureaus that calculate your credit score
  • Your credit score can vary depending on the scoring model used
  • A variety of factors, such as account history and credit usage, impact your score
  • High credit scores often give people access to low interest rates and more favorable loan terms
  • Subprime borrowers often have a more difficult time getting loans
  • A variety of strategies will help you boost your credit score into a higher range

What is a Credit Score?

A credit score is a three-digit number that reflects your creditworthiness. Lenders and creditors can look at this number to determine how likely you are to repay a loan on time.

The lower your credit score, the more likely you are to be seen as a risky borrower. On the other hand, the higher your credit score, the more favorably lenders will look at you.

Who sees your credit score?

Different companies use credit scores to help them determine if they should do business with you. When you apply for a mortgage, car loan, or credit card, that company will review your credit score.

In addition to influencing whether or not you are approved for a loan, your credit score can also influence your credit limit and interest rate.

How Is a Credit Score Calculated?

It’s easy to see that this number can make a difference in your financial life, but how is a credit score calculated?

Your credit score can vary somewhat–more on that later!–but you should have a basic understanding of the different factors that influence your credit score.

These are the main factors that shape your credit score:

  • Any instances of bankruptcy, foreclosure, or bills being sent to collections
  • Your past history of paying bills on time (or not!)
  • The amount of current debt you have
  • How many accounts you have open
  • The age of your accounts
  • How much available credit you are using
  • The number of accounts you’ve recently opened

If you keep in mind that your credit score is supposed to track how likely you are to repay a loan, these factors make sense.

Your payment history is the single most important factor in your credit score. After all, that history shows how you’ve managed credit in the past. In theory, that allows lenders to see how you’ll manage it in the future.

VantageScore vs FICO: What are the two kinds of credit scores?

The most common credit score is a FICO score. However, there are two main credit scores in the United States–FICO and VantageScore.

Both credit scores attempt to capture your creditworthiness. Still, you should know that they are calculated in slightly different ways.

While VantageScore originally used different credit score ranges, both FICO and VantageScore now assign you a credit score on a scale of 300-850. With both scores, the higher your credit score number, the more likely you are to be approved for a loan with favorable terms.

FICO is the original credit score company from the 1950s. VantageScore is a relative newcomer. It was created in 2006 as a joint effort from the three credit bureaus.

One of the biggest differences between the two credit score types is what it takes to calculate your score. To get a FICO score, you need at least one account that is at least six months old with some recent activity on it.

On the other hand, you can get a VantageScore with one open account. The account’s age does not matter. Young adults and other people who are working on building credit for the first time will likely prefer VantageScore over FICO for this reason.

You should also know that the points value and credit score ranges vary slightly between the two scores. That means that a late payment might have a slightly greater impact on one score than the other. Depending on the credit score model, you might also qualify as having good credit at a slightly different point value.

Credit Score Ranges

Credit score ranges can vary depending on each creditor. Sometimes, the ranges even depend on which model of the same credit score is used. While this can make credit scores seem a bit mysterious, there are general benchmarks that you should understand.

These are the general credit score ranges based on the base FICO score according to Experian.

  • Excellent: A credit score of 800 or higher
  • Very Good: A credit score from 740-799
  • Good: A credit score from 670-739
  • Fair: A credit score from 580-669
  • Poor: A credit score below 580

Generally speaking, a score of 640 or below means that you might be labeled a subprime borrower. If that happens, you likely will be charged higher interest rates and may need a co-signer.

Your credit score isn’t the only piece of information that lenders will consider. Other factors can include your income, other debts, and if you have an account history with that specific lender.

What is the average credit score?

The average FICO score is 714.

There has been an upward trend in credit scores over the past few years, starting in 2017. In 2021, Experian reported a four-point increase from the previous year.

What is a good credit score to have?

Credit scoring models can vary somewhat. However, if you are looking for a general idea of what is a good credit score, there’s a range you should know!

If your credit score is above 640, you are not considered a subprime borrower. Subprime borrowers are viewed as risky, which means they often pay subprime interest rates that are much higher. Subprime borrowers may also need co-signers or find themselves being denied loans or lines of credit altogether.

A good credit score is typically viewed as a score above 700. If you cross that threshold, you may enjoy lower interest rates. That’s good news because it saves you money over the life of your loan.

What is the minimum required to have a credit score?

You understand good credit and bad credit. But have you ever wondered how some people have no credit?

Calculating your FICO score and VantageScore have slightly different requirements. Regardless of which score is being calculated, though, creditors need some details about you! Those details come from having a credit history.

For them to start number crunching, you need at least one open credit account. The account should be open for at least six months. To have a credit score, credit bureaus also need a report from your account from the past six months.

People who have never opened an account or whose account is brand new simply don’t have enough information available for creditors to calculate a credit score.

Who tracks my credit score?

There are three major credit bureaus. These bureaus are responsible for reporting your credit score.

The three credit bureaus include:

  • Experian
  • Equifax
  • TransUnion

Your scores are likely to vary across the three bureaus. That’s because different information can sometimes be reported to them. If you’re wondering how that’s possible, it’s because not all lenders report information to all three bureaus.

The fact that the bureaus can sometimes start with different information about you isn’t the only reason your credit scores might be different. The credit bureaus also use slightly different scoring models.

Why are credit scores important?

Credit scores certainly aren’t the only aspect of personal finance that matters. But your credit score is important for many different reasons.

Getting approved for a loan

One of the biggest–and most obvious–reasons credit scores are important is because they determine if you get approved for a loan.

If your credit score is too high or you don’t have any credit, it is going to be more difficult for you to take out car or student loans. You’ll also probably have a difficult time getting approved for a mortgage.

In some instances, you will be required to get a co-signer. However, other lenders might deny your loan altogether.

Determining how much money you pay

Your credit score determines your interest rate. The better your credit score, the lower your interest rate. That means you get to keep more of your money.

Someone with a 5% interest rate on a 30-year mortgage is going to pay significantly more than someone who qualifies for a 3.5% rate.

If both people take out a 30-year mortgage on a $500,000 loan, the person with the 5% interest rate will pay $158,000 more than the person with a 3.5% rate over the life of the loan.

Setting up more favorable loan terms

In addition to snagging a lower interest rate, a good credit score can help you get better loan terms.

A higher credit score might give you access to a higher credit limit on a credit card or allow you to take out a larger mortgage.

You might also have access to more favorable repayment terms.

These different loan terms can make your loan better meet your needs and fit more comfortably into your lifestyle and your budget.

Avoiding a co-signer

Subprime borrowers are people whose credit scores fall below the good credit score threshold. Sometimes your loan application will be denied outright. Other times, lenders will ask for a co-signer.

A co-signer is someone like a friend, parent, spouse, who agrees to take on responsibility for the loan. In the event that you cannot repay the loan, the lender will expect the co-signer to take on the repayment.

If you want to skip the hassle and significant commitment of finding a co-signer, a high credit score can help with that!

Making life easier

Let’s say you don’t have any intention of using credit cards. Debt-free living is your goal. Does that mean you can ignore your credit score?

You might want to reconsider!

Having a good credit score can actually make different parts of your life easier. If you’re a renter, having a high credit score should make getting approved much easier.

It can also help you get cell phone service without a security deposit and make setting up utilities smoother. Some jobs even check your credit as part of a background check.

You can also expect to see a win when it comes to car insurance. Individuals with higher credit scores generally pay lower car insurance premiums. That’s true for most companies in most states.

A high credit score can also help you save on other types of insurance, such as homeowner’s insurance.

Earn more credit card bonuses

Are you interested in traveling with credit card points? Then you need to have a good or even excellent credit score.

In order to be approved for multiple credit cards to earn different bonuses, miles, and points, credit card companies look for high scores to make sure you’re a reliable borrower.

If you are interested in the best credit card sign up bonuses, check out our favorites here.

How do I check my credit score?

There are several different fast and free ways you can keep an eye on your credit score.

Use tools you already have

Most lenders use a FICO score. Recently, many banks and credit card companies have started offering free FICO score monitoring to their customers.

Explore the different online tools with your existing accounts. You might be surprised to find a feature that has been tracking your FICO score all along!

Use a free credit score app

There are plenty of free credit monitoring software options. Credit Karma is a long-time favorite. It helps you track all of your different accounts, repayment history, and gives you a quick snapshot of your credit score. Additionally, Credit Karma offers other resources to help you step up your financial game.

Pull your credit report

You can request your credit report from each of the three credit bureaus once per year. By viewing your full credit report, you can spot any inaccuracies and have them corrected.

Visit annualcreditreport.com to get started.

How can I improve my credit score?

Now that you know what a credit score is and how the credit score ranges work, you might be worried about your credit score. Fear not! There are several different ways that you can improve your credit score.

Check your credit score

Understanding what your credit score is and why it is low can help you improve your credit score fast.

Oftentimes, if you use a credit monitoring tool from your bank or through Credit Karma, the tools will spotlight different factors that have the biggest impact on your credit score. Being informed is the first step to addressing any issues!

Pay down debt

One of the best ways to improve your credit score is to pay down debt. This seems like a no-brainer.

However, some people are under the mistaken assumption that you always want to carry a small credit card balance. That credit score myth simply isn’t true. Paying your bills on time and paying your credit card in full will give your credit score a big boost.

Double check due dates

Did you know that you can sometimes adjust your payment due dates? Some people prefer to stagger payment dates and others prefer to take care of them all at once. Adjust your payment dates to better fit within your paycheck schedule and budget.

Whether you are able to adjust your due dates or not, set up a calendar reminder to make sure you pay your bills on time. You might also consider signing up for automatic payments. Making sure that you don’t miss a payment will help improve your credit score.

Keep old accounts open

Another mistake that people often make when it comes to credit scores is thinking that they should get rid of accounts they no longer use. On one hand, it’s a logical choice. You don’t have to worry about fraud and it streamlines your personal finances.

Conversely, though, closing old accounts can really damage your credit score. The age of your accounts is one factor used to calculate your score. By keeping that account open and in good standing, you can boost your credit score.

Skip applying for new accounts

When people are looking to build their credit, it is sometimes tempting to open multiple accounts. However, the number of new accounts and inquiries (sometimes called “hard pulls”) can actually ding your credit score.

In many instances, it is better to strategically open one or two accounts and manage them well. Then, as your credit history lengths, you can open more accounts if that would serve your needs.


Credit scores are a measure of your ability to pay back your debts and stay current on your financial obligations. The higher your score, the more access you have to top-tier credit cards, low interest rates, and the ability to refinance your mortgage.

Improving your score can save you thousands, but it may take some time. Just focus on staying current, catching up on old debts, and paying everything on time, and you’ll be enjoying the perks of a 700+ score in no time!

Jacob Wade

Jacob Wade

Jacob Wade has been a nationally-recognized personal finance expert for the past decade. He has written professionally for The Balance, The Spruce, LendingTree, Investing Answers, and other widely-followed sites. 
He’s also been a featured expert on CBS News, MSN Money, Forbes, Nasdaq, Yahoo! Finance, Go Banking Rates, and AOL Finance.

In 2018, Jacob quit his job and his family decided to sell everything (including their home) to take off on an adventure. They traveled the country in an RV for nearly 3 years, visiting over 38 states, 20+ national parks and eventually settling in the sunshine state!

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