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Bottom Line Up Front

  • A credit score helps lenders determine how much credit to lend to you and the likelihood you’ll be able to pay it back.
  • A good score can help you qualify for better rates on credit cards, car loans or a mortgage.
  • Your credit score is based on a number of factors, including your payment history, your total debt and how long you’ve been managing credit.
  • Reviewing your credit report annually is the first step to improving your credit score.

Having good credit is one of the keys to financial freedom. With it, you’ll not only qualify for better rates from lenders, but it can even help you in landing an apartment or job since landlords and employers may use credit scores to make decisions about who to rent to and hire. A higher credit score indicates that you can manage your money and are a responsible borrower.

What’s a Credit Score?

Your credit score is a numeric rating of your credit history as well as other related factors. It’s intended to convey to lenders and others how risky it might be to extend credit to you.

In the U.S., 2 main companies lead the credit scoring industry: FICO® and VantageScore®. While both companies develop credit scores and measure them in a range from 300 to 850, they calculate them slightly differently. The bottom line: the higher your score, the better your credit.

Some lenders use custom credit scores, which are usually built on the same criteria, but tailored for specific lenders or industries, such as auto loans. While lenders decide their own ranges for credit scores, scores under 580 are generally considered to be poor, while “good credit” is usually anything over 670. A score over 800 is excellent.

How Is My Credit Score Calculated?

Five factors are used to determine your credit score:

  1. Payment history: Do you pay your existing debts on time?
  2. Amount owed: How much debt do you currently owe? How does that compare to the amount of credit you have available to you? Learn more about your credit utilization ratio.
  3. Length of credit history: How long have you been managing credit? In other words, how much experience with credit do you have?
  4. Types of credit: Do you have a mix of different types of accounts, such as credit cards and other types of loans?
  5. Newly opened credit accounts: How much of your debt is new? Have you opened several new accounts in a short period of time?

These 5 categories may be weighted differently depending on the type of score.

How Can I Improve My Credit Score?

A good first step is to look at your credit reports. Each major credit bureau—Equifax®, Experian® and TransUnion®—compiles information from lenders who have provided you credit. This information includes the number and types of credit accounts you use, how long they’ve been open and whether you’ve paid your bills on time. Your credit report is a summary of open and closed accounts, outstanding balances, recent inquiries and negative items (late/missed payments, bankruptcy, tax liens, etc.).

You can order 1 free credit report a year from each bureau. (Order through the government-authorized Doing so helps you identify bad credit behavior or spot fraudulent activity or errors. A good strategy is to order a free report from a different bureau every 4 months; that way, you'll keep year-round tabs on what's being reported about you. Learn more about improving your credit.

Increase Your Credit Confidence

Whether you’re just establishing your credit or trying to rebuild it, the tips and resources in our Mission: Credit Confidence Dashboard can help you achieve your goal.

FICO is a registered trademark of Fair Isaac Corporation.
VantageScore is a registered trademark of VantageScore Solutions, LLC.
Equifax is a registered trademark of Equifax, Inc.
Experian is a registered trademark of Experian Information Solutions, Inc.
TransUnion is a registered trademark of TransUnion LLC.

This article is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.