Your credit score is a big deal when it comes to helping you reach your financial goals. This three-digit number often drives decisions about whether you can borrow money, the terms of that borrowing – and sometimes even where you can live or work. Understanding what a credit score is, how it's calculated and how it impacts your financial health can give you the power to effectively manage your financial life.

Definition and Purpose of a Credit Score

Your credit score is a three-digit number that represents your creditworthiness. Most lenders, landlords, and even some employers, use this score to gauge how responsible you are in managing credit and debt. Your credit score is mostly based on your credit history – and it allows financial institutions to decide whether you’re a good risk for loans, credit cards and even services like utilities.

Your credit score is based on a few key factors that show how well you handle credit. Although different scoring models exist, they generally consider the same factors when calculating your score. Here's a breakdown of what goes into calculating your score and why it matters:

Payment History

This is the most powerful part of your credit score, making up 35 percent of the total. Simply put, it’s about whether you pay your bills on time. Late payments, missed payments or accounts in collections can really hurt your score. On the flip side, consistently paying your bills on time helps keep your score healthy.

Credit Utilization

This piece of your score looks at how much of your available revolving credit you’re using – it counts for 30 percent of your score. It’s essentially the ratio of your credit card balances to your credit limits. A low credit utilization rate – ideally under 30 percent – is a good sign that you're not overspending, which can boost your score. But if you’re using a large chunk of your available credit, it might suggest to lenders that you're stretched too thin, which can drag down your score.

Length of Credit History

The length of time your credit accounts have been open makes up about 15 percent of your score. The longer your credit history, the better. Lenders want to see a track record of how you’ve handled building credit over time. Closing older accounts can shorten your history and might lower your score, so it’s usually a good idea to keep them open, even if you’re not regularly using them.

Types of Credit Used (Credit Mix)

This factor accounts for about 10 percent of your score and represents the different types of credit you have. A good mix of installment accounts, like a car loan or mortgage, and revolving credit, like credit cards, shows lenders you can manage different types of debt. You don’t need to have every kind of credit out there, but showing you can juggle a couple of different types is a plus.

New Credit

Opening a lot of new credit accounts in a short time can hurt your score, and this makes up 10 percent of your total score. Every time you apply for a new credit card or loan, a hard inquiry shows up on your credit report. Too many inquiries too fast might suggest to lenders that you’re trying to take on too much debt at once, which can make you look risky. Applying for new credit is fine – as long as you space it out.

It's important to note that, according to federal law, other factors like age, race, national origin or marital status do not influence your credit score.

Credit Score Ranges and Interpretation

FICO scores, developed by the Fair Isaac Corp, are one of the most widely used credit scoring models, ranging from 300 to 850. Of course, the higher your score, the more creditworthy you appear to lenders. Let’s break down the different score ranges and what each one means for you:

Excellent Credit (800-850)

If your credit score falls between 800 and 850, you’re in the “excellent” range. Borrowers in this category can enjoy the best of everything – whether it’s credit cards, mortgages or personal loans. Not only are you more likely to get approved for new credit, but you’ll also likely get the lowest interest rates and the most favorable loan terms. Lenders view you as a very low-risk borrower.

Good Credit (740-799)

A score between 740 and 799 is considered “good,” and it’s still high enough to qualify you for favorable loan terms. People with good credit are approved for most credit products and typically receive competitive interest rates, though they may not be quite as low as those offered to borrowers in the excellent range. If you’re looking to secure a mortgage, car loan, or refinance existing debt, a score in this range puts you in a strong position, though you may pay slightly more in interest compared to someone with an excellent score.

Fair Credit (670-739)

If your score falls within the 670 to 739 range, you have “fair” credit. While you’re still likely to be approved for loans and credit cards, the terms may not be as favorable. Interest rates are typically higher, and credit limits may be lower compared to those with better scores. This range indicates a moderate level of credit risk for lenders, so they may require more documentation or offer less flexibility in loan terms.

Poor Credit (580-669)

A score between 580 and 669 is classified as “poor.” If your credit falls in this range, you may face limited borrowing options, and those you do qualify for are likely to come with steep interest rates. Lenders view borrowers in this range as higher risk, so they may require a larger down payment or collateral to secure a loan. While approval isn’t impossible, it can be a challenge to find favorable terms. People with poor credit often benefit from credit-building strategies, such as paying down debt and ensuring all bills are paid on time, to start moving toward a higher score.

Very Poor Credit (300-579)

A score below 580 is considered “very poor,” which can make it extremely difficult to get personal loans or credit cards. Lenders see borrowers in this range as extremely high risk, often leading to denials or only approving applications for subprime loans with sky-high interest rates and fees. This range may reflect significant issues like missed payments, defaults or bankruptcy. If your score falls in this range, it’s essential to focus on rebuilding your credit, as even modest improvements can open the door to more lending options in the future.

Importance of a Good Credit Score

A good credit score isn’t just a number – it’s a key to unlocking a whole range of financial benefits. Maintaining a good score can make things easier and more affordable and may even open more financial opportunities. Here’s a closer look at why a good credit score is so important:

Loan Approval and Interest Rates

One of the most obvious benefits of having a good credit score is that it greatly increases your chances of being approved for loans. Whether it’s a personal loan, a mortgage or an auto loan, lenders are more likely to trust that you’ll repay the money if you have a solid credit history. But the benefits of good credit don’t stop at approval – your credit score also dictates the interest rate you’ll get. A higher score usually means a lower interest rate, which can save you thousands over the life of a loan.

Credit Card Applications

A good credit score doesn’t just help you get approved for loans – it also gives you access to better credit card offers. Credit card issuers are more inclined to offer low-interest cards, higher credit limits and attractive rewards programs to people with good credit. These rewards might include cash back, travel perks or points that can be redeemed for different kinds of benefits. Plus, with a good score, you can often avoid high annual fees and can access balance transfer offers with lower or even zero interest rates. Essentially, a good credit score gives you better tools for managing your spending and earning rewards.

Housing and Employment Opportunities

Your credit score can affect more than just your financial life—it can also impact your ability to rent a home or even get a job. Many landlords check prospective tenants’ credit scores as part of the rental application process. They use this information to decide whether you’re likely to pay your rent on time. If your credit score is low, you may need to pay a larger security deposit – or you might not be approved at all. And some employers, especially in fields that deal with finances, also review credit reports during the hiring process.

Utility Service Approval

Even some utility companies and service providers – like phone or internet companies – may review your credit score before setting up your services. If your credit is low, they might ask for a deposit before activating your account, while a higher score can help you skip that extra cost. A good credit score streamlines the process, letting you set up services with minimal hassle and upfront costs.

How Credit Scores Are Calculated?

Credit scores are calculated using several different models, but the two most common are FICO and VantageScore. Here’s how they work:

Scoring Models (FICO, VantageScore)

FICO scores are used by about 90 percent of lenders, while VantageScore is a tri-bureau score created by the three major credit bureaus: Equifax, Experian and TransUnion.

Weighting Factors in Calculation

Payment history, credit utilization, length of credit history, new credit and credit mix all factor into the calculation, with payment history and credit usage being the most influential.

Impact of Negative Information

Negatives like late payments, collections and bankruptcies can stay on your credit report for up to seven years and can dramatically lower your score.

Monitoring and Checking Your Credit Score

Monitoring your credit score regularly helps you stay on top of your financial health.

Free Credit Reports

You’re entitled to one free credit report per year from each of the three credit bureaus via AnnualCreditReport.com.

Credit Monitoring Services

Credit monitoring services are tools that keep an eye on your credit reports and notify you of changes. These services track your credit score and alert you if something significant happens, like a sudden drop in your score or a new account opened in your name. It's a great way to stay on top of your credit and catch any errors or suspicious activity, such as identity theft, early on.

Check out options like Credit Karma, Experian, myFICO or Credit Sesame.

Frequency of Checking

Try to check your credit score at least once a year or before applying for any major loans.

Improving and Building Your Credit Score

Improving your credit score doesn’t happen overnight, but with the right strategies and a little patience, you can make progress over time. A strong credit score opens up many financial doors, but it takes steady, responsible credit habits to build and maintain. Here’s how you can improve your credit history through a few key actions:

Paying Bills on Time

One of the most important things you can do for your credit score is to consistently pay your bills on time. Payment history is the single largest factor influencing your credit score, accounting for about 35 percent of it. Even one late payment can tank your score, and the later the payment, the worse the effect. To keep from missing payments, consider setting up automatic payments or reminders so you never fall behind.

Reducing Credit Card Balances

Your credit utilization – the percentage of available credit that you’re using – is the second most important factor in your credit score. Ideally, you should aim to keep your utilization under 30 percent of your total credit limit. For example, if you have a combined credit limit of $10,000, try to keep your balances under $3,000. Lower utilization rates tell lenders that you’re responsibly managing your credit and aren’t overextended. Paying down high balances will reduce your credit utilization ratio, which can give your score a big boost.

Diversifying Credit Types

Having a mix of different types of credit accounts can also help improve your credit history. This is referred to as your "credit mix," and it makes up about 10 percent of your score. Lenders like to see that you can effectively handle different kinds of credit, such as a mortgage (an installment loan) alongside a credit card (revolving credit). While you shouldn’t take out loans just to improve your credit mix, maintaining a variety of credit types can have a positive effect on your score over time.

Lengthening Credit History

The length of your credit history accounts for about 15 percent of your credit score, and longer is better. Keeping your oldest accounts open and active can help you build a strong credit profile. Closing old accounts, especially those in good standing, can shorten your average credit age and hurt your score. If you’re not using an older credit card, consider making occasional small purchases and paying them off to keep the account active. A longer credit history gives lenders more data to assess your reliability, which can mean a higher score.

Limiting New Credit Applications

Every time you apply for a new credit account, the lender makes a "hard inquiry" on your credit report. While one or two inquiries may not have a big impact, multiple applications within a short period can lower your score. Lenders may take frequent credit applications as a sign that you’re desperate for credit or unable to manage your finances, which could make you appear like a riskier borrower. If you’re planning to apply for new credit, space out your applications and only apply for what you truly need.

Common Factors That Negatively Affect Credit Scores

Your credit score reflects how well you manage your finances, and certain actions can cause it to dip. Be aware of these factors to avoid costly mistakes and keep your score in good shape.

Late Payments

Missing payments is one of the most damaging things you can do to your credit score. Whether it’s a credit card bill, mortgage or loan payment, falling behind on any debt can hurt your score. The longer the payment is overdue, the worse the impact – 30 days late is bad, but 60 or 90 days late is even worse. Late payments stay on your credit report for up to seven years and signal to lenders that you may be an unreliable borrower. Even a single missed payment can knock significant points off your score, so staying on top of due dates is essential.

High Credit Card Balances

Maxing out or carrying high balances on your credit cards can lower your score because of their effect on your credit utilization ratio. As a general rule, you want to keep your utilization below 30 percent of your available credit. Using too much credit suggests to lenders that you might be overextending yourself, which can hurt your score.

Bankruptcies and Foreclosures

Few financial events are as damaging as bankruptcies and foreclosures. A bankruptcy can stay on your credit report for up to 10 years, and a foreclosure stays for up to seven. Both of these events dramatically lower your credit score because they indicate you weren’t able to meet major financial commitments.

Collections and Charge-Offs

If you don’t pay a debt for a long period, the creditor might write it off as a "charge-off" and send it to collections. Having an account go into collections or being charged off is a major red flag on your credit report, showing that you weren’t able to meet your obligations. This can lead to a steep drop in your score, and it stays on your report for up to seven years. Even if you pay off the debt later, the fact that it went into collections will still be visible to lenders.

Rebuilding Credit After Setbacks

If your credit has taken a hit, don’t worry – rebuilding it is certainly within your reach. With the right steps and a little patience, you can get back on track. Here are some effective ways to help you rebuild your credit:

Developing a Plan

The first thing you want to do is make a solid plan for managing your finances. Start by making sure you pay all your bills on time, since this is crucial for improving or maintaining your credit score. If you have outstanding debts, prioritize paying those down, especially high-interest accounts or any that are behind. Consistency is key here – consider setting up reminders or automatic payments to make it easier to stay on top of due dates.

Secured Credit Cards

Secured credit cards can be a good option if you're trying to rebuild your credit. With a secured card, you make a cash deposit that usually acts as your credit limit. It’s a way to show lenders you’re responsible with credit. Just remember to use it wisely: keep your balance low and pay it off in full each month. Over time, as you demonstrate good habits, you may qualify for an unsecured card, which can further boost your credit score.

Another alternative to a secured credit card is a product like the Juzt Digital Credit Card, which gives you all the credit-building benefits of a secured credit card, without the security deposit.

Credit-Builder Loans

Credit-builder loans are another effective tool for improving your credit. These loans are typically offered by credit unions or community banks and work a bit differently than regular loans. Here’s how it works: you borrow a small amount of money, but instead of receiving it up front, it gets held in a savings account on your behalf. You make payments over a set period, and once you’ve paid it off, the money is released to you. Not only does this help you save, but those regular payments also build a positive credit history.

The Role of Credit Scores in Different Financial Transactions

Credit scores play a crucial part in many areas of your financial life, from car loans to credit cards. Knowing how your score affects different transactions can help you make smarter financial choices. Here’s a closer look:

Auto Loans

When you’re ready to buy a car and need financing, auto lenders will check your credit score to see if you qualify for a loan, along with what interest rate they’ll offer. If you have a higher credit score, it signals to lenders that you’re a reliable borrower, which can lead to lower interest rates. But if your score is on the lower side, you might face higher rates or even challenges getting approved.

Mortgages

Your credit score is a major factor when you apply for a mortgage. A higher score not only boosts your chances of getting approved, but it also helps you get a lower interest rate. This can greatly affect your monthly payments and the total amount you'll pay over the life of your mortgage. With a lower rate, you could afford a more expensive home or save thousands in interest.

Credit Cards

When it comes to credit cards, your credit score is the key to unlocking better offers and rewards. If you have a high score, you’re more likely to qualify for premium cards that offer cash back, travel rewards or lower interest rates. On the other hand, a lower score might limit your options to cards with fewer benefits and higher fees. Plus, since credit cards can impact your overall credit utilization rate, having a good score can help you manage credit more effectively and open up financial perks. 

Personal Loans

For personal loans, your credit score plays a vital role in whether you’ll get approved, how much you can borrow, and at what interest rate. Lenders, each with their own criteria,  look at your score to decide how risky it is to lend to you – a higher score usually means you’re viewed as less risky, which can lead to higher loan amounts and lower rates. If your score is lower, you might find your options restricted and face higher costs.

Key Takeaways

Your credit score plays an important role in your financial life, from loan approvals to interest rates. By understanding how credit scores work, monitoring your credit health, and making strategic financial decisions, you can maintain or improve your credit history – opening doors to better financial opportunities and your own peace of mind.

This article provides general information only and does not constitute financial or legal advice. For guidance specific to your situation, consider consulting a financial advisor.