What is a credit score, and why does it matter?

Credit scores can be complicated, but what goes into them shouldn't be a mystery.

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There are a lot of options out there when it comes to credit cards, from best cards for saving money to the best cards for staying in hotels, to the best cards for traveling without planes, to the overall list of the best credit cards. But before you get the best credit card for, well, anything, you need to have a solid understanding of one very important thing: your credit score.

Approximately half of Americans don’t understand the full impact of their credit score and what it can affect, according to a 2017 survey conducted by NerdWallet.

What is a credit score?

In the most simple of terms, a credit score is a three-digit number ranging from 300 to 850 that indicates how likely you are to pay off debt (some scoring models exceed 900, but those ones are rarely used, according to WalletHub). The higher your number, the better you’ve historically been at repaying things like your credit card balance, student-loan debt, car loan, or home mortgage. Credit scores can be calculated in many ways (more on that coming up), but a general rule of thumb is that a score above 800 is considered “exceptional,” 740-799 is “very good,” 670-739 is “good,” 580-699 is “fair,” and anything below a 580 is “very poor.” Most people have scores between 600 and 750, according to Experian, one of the three main credit bureaus that tracks consumer credit history and tabulates credit scores.

Future lenders, landlords, and even employers request this score as a means of evaluating the risk they’d take in going into business with you. The better your score, the greater the chances you’ll get what you’re applying for, and at a better interest rate if that’s a factor. “I like defining these terms based on the likelihood that you’ll be approved for the best deals lenders have to offer,” says credit expert John Ulzheimer, formerly of FICO (a credit score calculation model) and Equifax (another of the three credit bureaus).

These “best deals” can have a tangible effect on your net worth over time. For example, when applying for a $100,000 mortgage, someone with a high credit score might get a 4 percent interest rate, while someone with a lower score could get a 5.7 percent rate, according to credit expert John Bonsack. Over 30 years, this could lead to a nearly $40,000 difference in total payments.

How is a credit score calculated?

There are many different types of credit scores (“hundreds,” according to Ulzheimer), but the main ones are calculated by FICO and VantageScore using their own proprietary calculations. “[FICO and VantageScore] are two entirely different companies that build different scoring platforms,” Ulzheimer says. “Think Pepsi and Coke. Same industry, just competitors.”

For both, the most important factor is payment history. It accounts for 35 percent of a FICO score, and is described by VantageScore, which does not disclose its formula to the public, as “extremely influential.” Other factors for FICO are your amounts owed (30 percent), length of credit history (15 percent), your credit mix, or types of loans you have (10 percent), and any “new credit,” or how many credit cards you’ve opened in the recent past (10 percent). Other VantageScore factors include the percentage of credit used, and the type and duration of credit (both “highly influential”); total debt (“moderately influential”); and most recent credit behavior, and any inquiries on your account from potential lenders (“less influential”).

In addition, the three main credit bureaus, Experian, Equifax, and TransUnion, analyze and present an individual’s credit score for lenders. The scores are calculated differently based on the agency—according to Investopedia, Experian uses their own Experian/FICO V2 model, Equifax uses their own model that ranges from 280-850, and TransUnion uses VantageScore. Because of this, your credit score may vary slightly depending on the bureau you use.

How can you check your score?

Checking your credit score can be pretty simple. Many credit card issuers offer a free monthly check of your score, or even ongoing monitoring to flag any major changes. You can also use sites like Credit.com and CreditKarma, which offer free VantageScore summaries, but will charge for additional services such as credit monitoring, and may push you towards signing up for financial products once they know your credit score.

You may (and should) also request a free credit report listing your credit history, which you can do for free once a year per each of the three credit bureaus via annualcreditreport.com, the website that the federal government set up to help you access your reports. Although the reports do not contain your score, they include detailed information about your credit history and background and could reveal issues that may affect your score.

How can you get the best score possible?

Because payment history is the most important part of your credit score, it is unlikely that anyone will start off with a perfect 850. Instead, you must build it up over time to prove to lenders that you are capable of paying back debt. It can take up to six months to see a score if you're starting from scratch, according to NerdWallet.

Many spending and repayment habits can make—or break—your credit score, but the top-line advice is, ideally, to avoid charging more than you can afford to pay off in full each month. With larger loans or balances, make at least the minimum payment required every month, with no skipped months (even if you've overpaid the minimum in the past). Remember: Your credit score provides evidence of your responsibility as a borrower, so you want it to show that you can reliably and consistently pay back any money that you owe.

Our editors review and recommend products to help you buy the stuff you need. If you make a purchase by clicking one of our links, we may earn a small share of the revenue. Our picks and opinions are independent from any business incentives.

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Our editors review and recommend products to help you buy the stuff you need. If you make a purchase by clicking one of our links, we may earn a small share of the revenue. Our picks and opinions are independent from any business incentives.
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