A good credit score makes it easier to rent apartments, buy cars, and take out loans, while a bad credit score can make things more difficult. But where do those numbers come from?
The better you understand how credit scores work, the easier it will be to raise yours. Wondering what your score means? We’ve broken it down in this simple guide: read on to learn what you need to know.
Why Credit Scores Exist
It seems strange that so much of life is determined by a number—and to an extent, it is. But there is a reason for credit scores.
The number works as a shorthand to show financial institutions, like banks, how good you are at paying back debt. Instead of reading through your whole credit history, they can look at your score to get the quick picture.
There are a few different methods for getting a credit score, but the FICO method is by far the most common. (FICO stands for Fair Isaac Corporation, a company that provides credit scoring services.)
What’s a Good Credit Score?
The FICO scoring method gives numbers from 300 to 850. Generally speaking, the breakdown looks like this:
- 300-629: Bad credit
- 630-689: Fair credit
- 690-719: Good credit
- 720-850: Excellent credit
While the exact ranges differ depending on who you ask, the higher your score, the better your credit.
The Factors that Determine Your Score
Now, how are those numbers determined? FICO uses a few different categories, each with a different weight (the percentages we list below), to decide what your score will be.
- Payment History (35%): Payment history refers to your ability to make regular, on-time payments. If you’re making late payments or missing them altogether, your score will drop quickly, and lenders won’t trust you to pay back new loans in the future.
- Credit Utilization (30%): Credit utilization is another way of saying how much debt you currently hold. For example, if your only credit card is maxed out, you have high credit utilization, which will hurt your score. According to FICO, people who only use a small amount of their total credit are more responsible borrowers. While a low balance on your credit cards won’t hurt your score, a large one will.
- Credit History (15%): Next, you get scored on how long your credit history is. FICO wants to see that you can hold onto loans and credit cards over the long term and use them responsibly. The longer you’ve had your accounts open, the better. That’s why it’s important not to close accounts, even if you use them rarely.
- Credit Mix (10%): Ideally, you should have a variety of credit types, such as both loans and credit cards, to show that you can handle and use them all effectively.
- New Credit (10%): This doesn’t mean you should take out new loans or open new credit cards. Instead, FICO wants to see borrowers who limit how many new loans or cards they open or apply for. That way, they can see that you’re using your credit well, and not just getting a new card every time you max out an old one.
How to Check Your Credit Score
Knowing your credit score will let you put this information to good use. You can check your score through credit score apps, as well as some banks and credit card companies, and you can also check it when applying for a loan.
Also, every year, you can visit AnnualCreditReport.com to get your free, full credit report from the three main credit bureaus: Experian, Equifax, and TransUnion. This will help you see the factors behind your credit score. The more you know, the easier it will be to build your credit score higher.
To learn more, check out How-To Geek’s guide on how to view and monitor your credit report for free.