How Credit Scores Work

The plain answer

A credit score is a number that estimates how likely you are to repay borrowed money as agreed. Lenders use it when deciding whether to approve you and what interest rate or credit limit to offer.

Your score is calculated from information in a credit report. A credit report is a record of your credit accounts, payment history, balances, and certain public records. The three major credit bureaus, Equifax, Experian, and TransUnion, collect this information.

You do not have one universal credit score. Different scoring models and different credit reports can produce different numbers.

How it actually works

Two common scoring model families are FICO and VantageScore. A scoring model is the formula used to turn information from a credit report into a score. Most general credit scores use a range of 300 to 850, with a higher number representing lower estimated lending risk.

The exact formulas are not public, but they generally consider these categories:

• Payment history: Whether you paid credit accounts on time. A payment is usually reported as late after it is at least 30 days past due.
• Amounts owed: How much debt you have, including your credit utilization. Credit utilization is the percentage of your revolving credit limits that you are using.
• Length of credit history: How long your accounts have been open and the age of your overall credit history.
• New credit: Recently opened accounts and hard inquiries. A hard inquiry is a lender’s review of your credit after you apply for credit.
• Credit mix: Your experience with different account types, such as credit cards and installment loans.

Payment history and amounts owed usually have the greatest influence in widely used FICO models. Their exact effect depends on the rest of your credit file.

Creditors typically send account information to the bureaus about once a month. They may report on different dates or report to only some bureaus. This timing can make your scores change even when you have not applied for anything new.

Checking your own credit is a soft inquiry. A soft inquiry does not affect your score. A hard inquiry can have a small, temporary effect, though its importance varies by credit profile.

What this means for you

Focus on the underlying report rather than a single score shown in an app. Pay every bill by its due date, keep reported card balances manageable, and review your credit reports for errors.

If you plan to apply for a loan, check your reports early enough to dispute incorrect information. You can review reports from all three major bureaus at AnnualCreditReport.com. A dispute is a formal request for a bureau to investigate information you believe is inaccurate.

Do not expect every lender to see the same score that you see. A lender may use a different model, a score designed for a particular loan type, or data from a different bureau.

Common mistakes

• Treating a score from one app as your only credit score.
• Carrying interest-bearing debt because you think it helps your score. Paying interest is not required to build credit.
• Assuming income is part of your credit score. Income may affect a lender’s decision, but it is not included in standard credit scores.
• Closing an old card without considering its effect on your available credit and account history.
• Ignoring a credit report because the displayed score looks acceptable.
• Paying only the minimum without a plan to eliminate the balance. On-time minimum payments can protect payment history, but interest can make the debt expensive.

Related pages

• What Actually Improves Your Credit Score
• When Should You Get a Credit Card?
• Choosing Your First Credit Card