Understanding how credit works may feel like a mystery, especially if you have limited experience with credit. Your credit score and credit report are used in many ways, from getting a mortgage to buying a car.
If you were to Google “understanding credit” right now, you’d turn up more than 9 billion hits on the topic. That’s a huge amount of information to sift through! On top of that, you may not be able to tell what information is reliable and what is misleading.
Here, we’re helping you cut through the clutter by breaking down credit basics. We’ll cover how credit works, factors affecting your credit report, and how to raise your credit score.
A credit score is a personalized, three-digit number that demonstrates your creditworthiness. It’s calculated based on your credit history and used by lenders to assess the risk of lending you money and your likelihood of paying back debt. It factors into the type, terms, and loan amount you are approved for.
The most common type of credit score is the FICO score, which ranges from 300 to 850. The higher your score, the better your creditworthiness.
The three digits that make up your credit score hold a lot of power over the types of credit you can earn, the types of loans you may be approved or rejected for, and your spending limits.
Your personal 3-digit score is built on your credit history, which takes time to build and maintain. A good credit score typically falls within the range of 670 to 739 on the FICO scale. Scores from 740 to 799 are considered very good, and scores of 800 and above are considered excellent. A credit score below 670 is generally considered fair or poor.
You can have more than one credit score. Different credit scoring models and variations in data reported to the three major credit bureaus can result in multiple credit scores, so it’s common for your score to differ slightly across the reporting agencies.
Your credit score can fluctuate for many reasons. All of the factors that influence your score—such as payment history and credit mix—can cause short-term and long-term fluctuations. You might see your credit score change frequently and seemingly for no reason. This is because creditors, lenders, collection agencies, and public records report new data daily.
Credit is one of the most important topics related to your personal finances. It consistently shows up and plays a crucial role in your financial well-being. That’s why it’s so important to understand your credit score and how credit works.
Your credit affects your ability to borrow money and influences the terms of the loans you’re approved for. Your credit score will be used by banks, credit unions, insurance companies, credit card companies, lenders, and others who evaluate your creditworthiness.
Lenders use your credit score to determine the likelihood you will repay a loan or credit card balance. No credit or a poor credit score can hurt your chances of getting a loan. On the other hand, a good credit score can set you on the path to financial freedom.
Good credit can help you secure loans for major purchases like a home or car, get approved for credit cards, and even influence job opportunities or your ability to rent an apartment. Your credit score also impacts your interest rates, with a better score getting you a lower rate.
The graphic below shows the main factors that make up your credit score:
Let’s break down exactly what affects your credit, the role these factors play in your credit report, and the steps you can take to improve your credit score.
| Factor Affecting Your Credit | Percentage of Your Score | What It Is | How to Improve It |
| Payment History | 35% | This factor looks at whether you have paid your bills on time and the frequency and severity of any late payments. | Pay all your bills on time. Set up reminders or automatic payments to avoid missing due dates. |
| Amount Owed | 30% | This factor considers how much you owe on each of your open credit accounts and the percentage of your credit limits you are using (credit utilization ratio). | Keep your credit utilization ratio low by paying down balances and avoiding maxing out your credit limits. Aim to use less than 30% of your available credit. |
| Length of Credit History | 15% | This factor looks at how long you have had each of your credit accounts and the average age of your accounts. | Maintain older accounts to increase the length of your credit history. Avoid closing old credit accounts unless necessary. |
| New Credit | 10% | This factor considers how many new credit accounts you have opened recently and the number of recent credit inquiries. | Limit the number of new credit accounts you open. Space out credit applications to reduce the impact on your score. Monitor your credit report for any unauthorized inquiries. |
| Credit Mix | 10% | This factor looks at the variety of credit accounts you have, such as credit cards, mortgages, auto loans, and installment loans. | Aim to have a mix of different types of credit accounts. Manage each type responsibly to demonstrate your ability to handle various forms of credit. |
When it comes to your credit history, it’s important to note that your most recent activity factors heavily into your creditworthiness. Here is the approximate weight given to your credit activity for each year:
If you want to maintain a healthy credit score, it’s important to understand the factors that can hurt your score. Here are the most common factors that can hurt your credit score:
Additional factors that can negatively affect your credit score include borrowing from finance companies or transferring credit balances.
There are a lot of things that influence your credit, but it might be a relief to know there are a few things that don’t play a role. Here are a few factors that don’t affect the strength of your credit score:
Checking your own credit. Personal credit checks are considered soft inquiries and do not affect your credit score.
You can start building, improving, and maintaining your credit score in many ways. Here are some of the most important things you can do to create and maintain a healthy credit score:
A note of caution: beware of companies that claim they can build or repair your credit fast. Unfortunately, many of these sources are scams. The only way to improve or rebuild your credit is to rely on positive behavior changes over time.
Make payments on time, aim to use less than 30% of your available credit, be careful about closing available lines of credit, limit the number of new accounts you open, and keep a mix of credit accounts. Combined with patience, these actions will put you on the right track to a good credit score.
Don’t let your credit score get in the way of where you want to go. Get Credit is a simple way to build or rebuild your credit and build up a stack of cash along the way. It’s a 12-month loan that helps you improve your credit history and increase your savings by making on-time payments.
A credit score is a personalized, three-digit number that creditors use to evaluate your history of borrowing money and your likelihood of paying back debt. Scores typically range from 300 to 850.
Credit is one of the most important topics related to your personal finances. It affects your ability to borrow money and influences the terms of your approved loans.
No credit or a poor credit score can hurt your chances of getting a loan. On the other hand, a good credit score can help you secure loans for major purchases like a home or car, get approved for credit cards, and even influence job opportunities or your ability to rent an apartment.
Several factors influence your credit score, including:
There are certain factors do not impact your credit score, including:
A good credit score typically falls within the range of 670 to 739 on the FICO scale. Scores from 740 to 799 are considered very good, and scores of 800 and above are considered excellent. A credit score below 670 is generally considered fair or poor.
There are many ways you can start building, improving, and maintaining your credit score, including:
There is no fast fix for building or repairing credit. The best way to improve your credit score is to acquire a solid credit history with years of experience.
Many financial institutions like banks and credit unions offer you free access to your credit score, allowing you to keep a close eye on it. You should also monitor your credit by regularly checking your credit report.
A credit report is a detailed record of your credit history that includes information about credit accounts, payment history, and inquiries made by lenders. Lenders and creditors use it to evaluate your creditworthiness, and you can use it to monitor your financial well-being.
It’s a good idea to check your credit score regularly. At a minimum, you should request your credit report once a year. If you plan to apply for a loan, you may want to check it more frequently to ensure it’s in good shape.
You can get a free copy of your credit report once every 12 months from each of the three major credit bureaus (Equifax, Experian, and TransUnion) through AnnualCreditReport.com.
If you find an error on your credit report, you should:
Learn more about how to dispute an error on your credit report here.
