How Credit Scores Work: Everything You Need to Know

How much do you know about what makes up a credit score, or how it all works? Think of your score as your financial report card. It's a number that reflects how you have managed credit over time, including your payment history, credit use and length of credit history. This score affects more than just loan approvals. It influences the interest rates you get on mortgages and car loans. It can even come into play when you’re renting an apartment or applying for certain jobs.

The good news is that you have some control over your credit score. Understanding how it works can give you greater control. You can take steps to build it up and keep it strong. Whether you’re just learning how to build credit or looking to improve your score, knowing the basics can help you make smart financial decisions.

What is a credit score?

Your credit score is a 3-digit number that ranges from 300 to 850. The 3 major credit reporting agencies—Equifax®, Experian® and TransUnion®—calculate this number based on information in your credit report. Your credit report tracks things like how many credit cards you have, whether you pay bills on time and how much debt you’re carrying.

Lenders check your credit score when you apply for a loan or credit card. A higher score suggests you’re likely to pay back what you borrow. A lower score might signal a credit risk, meaning you’ll face higher interest rates or have a harder time getting approved.

Your score isn’t just for loans, though. Landlords often check credit scores before approving rental applications. Some employers review credit reports during the hiring process, especially for jobs that involve handling money. Insurance companies might also look at your credit when setting your rates. Put simply: Your score provides a broad snapshot of how you manage money.

How are credit scores calculated?

Credit bureaus use 5 main factors in their formula to determine your credit score. Each factor carries a different weight in the overall calculation, so here they are broken down by percentage of the whole.

Payment history (35%)

Positive payment history is the biggest factor in your score. It tracks whether you pay your bills on time. Late or missed payments can hurt your score, but a solid history of on-time payments helps build it up. This includes credit cards, loans, mortgages and any other accounts that report to the credit bureaus.

Credit utilization (30%)

This measures how much of your available credit you’re using. If you have a credit card with a $1,000 limit and you’re carrying a $300 balance, then your utilization is 30%. Lower is better. Try to keep your utilization below 30% across all your credit cards.

Length of credit history (15%)

This looks at how long you’ve been using credit. It includes the age of your oldest account and your newest account, and the average age of all your accounts. A longer credit history generally helps your score because it gives lenders more information about your borrowing habits.

Credit mix (10%)

This factor considers the different types of credit you have. Credit cards, car loans, mortgages and personal loans all count as different types. Having a mix shows lenders you can handle various kinds of credit responsibly. That said, you shouldn’t open accounts you don’t need just to improve your mix.

New credit (10%)

Opening several new credit accounts in a short time can lower your score. Most credit applications cause a hard inquiry, which can temporarily reduce your score. Multiple inquiries for the same loan type within a short timeframe are usually treated as one inquiry. Too many hard inquiries signal that you might be taking on more debt than you can handle. Space out your credit applications when possible.

What’s a good credit score?

Credit scores fall between 300 and 850. The higher your score, the better. Where your score lands in that range affects what kind of credit terms you can get. Here’s how the credit score ranges generally break down:

• 800-850 (Excellent): You’re in great shape. Lenders see you as a very low risk, which means you’ll likely qualify for the best interest rates and terms available.
• 740-799 (Very Good): You have strong credit. You’re likely to get approved for loans and credit cards with favorable rates.
• 670-739 (Good): You’re above average. Most lenders are likely to approve you, though you might not get the absolute lowest rates.
• 580-669 (Fair): You can still get approved for credit, but you’ll likely face higher interest rates. This is a good time to focus on building your score.
• 300-579 (Poor): Getting approved for credit may be challenging. You might need to start with secured credit cards or credit-builder loans to strengthen your score.

As of April 2025, FICO® reports an average credit score of 715. However, different lenders may have slightly different criteria for what they consider good or excellent credit. These ranges can give you a solid framework for understanding where you are and where you want to be.

Different credit scoring models

You might notice your credit score looks different depending on where you check it. That’s because there are various scoring models, and each one calculates your score differently.

FICO® Score

This is the most widely used credit score. About 90% of lenders rely on FICO® credit scores when making lending decisions. FICO® uses the 5 factors we covered above, with payment history and credit utilization carrying the most weight.

VantageScore

This model was created by the 3 major credit bureaus: Equifax®, Experian® and TransUnion®. It uses similar factors to FICO® but weighs them differently. You might see VantageScore when you check your credit through free monitoring services.

The difference in these models is negligible for most people. One model might weigh recent activity more heavily. Another might look at older data differently. The credit bureaus themselves may also have slightly different information about you, which leads to score variations.

How to improve your credit score

Your credit score changes as your credit habits change. Here are some of the most effective ways to strengthen your score over time:

• Keep your balance low. Keeping a low credit utilization ratio is good for your credit score. A credit utilization ratio compares your credit balances to your credit limits (or how much of your available credit you’ve used). Ideally, try to keep your utilization ratio below 30%. 
• Always pay your bills on time. Making a habit of repaying monthly bills on time can improve your credit score, which will be seen as favorable to creditors. 
• Enrich your credit profile. Not all recurring payments are automatically reported to the credit bureaus. However, by opting into recurring payment reporting services platforms, you might be able to build your credit profile by reporting payments you make regularly, like rent, utilities and phone bills. Auto loans are typically reported automatically. 
• Review your credit report for mistakes and request corrections. You can order one free credit report per year from each of the 3 major credit bureaus (Equifax®, Experian® and TransUnion®) at AnnualCreditReport.com. Check out our step-by-step guidance on disputing any inaccuracies or mistakes. 
• Avoid opening new accounts right before a major purchase like a home or car. New accounts can affect the average age of your credit history and score, possibly disqualifying you from better loans.

Get focused on your credit score

Lenders at financial institutions check your credit score when you submit a loan application to determine your creditworthiness, so you should, too. Know your credit score ahead of applying for your next loan or credit card so you can improve it, if needed. Navy Federal Credit Union’s Mission: Credit Confidence® dashboard lets you check your credit score and provides a wealth of resources for anyone who is building, rebuilding or managing their credit.