What is a Credit Score and What Are They For?

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Your credit score is a vital part of your financial life. A good credit score unlocks the best rates and offers, and a poor score can limit your options. Here's what you should know about your credit score and what it can do for you. 

What is a Credit Score?

Your credit score is a three-digit number that represents your financial history. Lenders use your credit score to estimate the likelihood that you'll repay borrowed funds. 

Credit scores range from 300 to 850, with higher scores being better.

How Are They Calculated?

The main credit bureaus—Equifax, Experian, and TransUnion—calculate and report your score to lenders. There are a few different scoring models, but they're all based on your payment and credit history.

Things that affect your score include:

• How long you've had credit

 

• Your debts

 

• Your payment history

 

• The types of accounts you have (credit cards, loans)

 

• How many credit accounts you have

 

• Your applications for new credit

 

• How much credit you're using

As your credit history changes, so does your score. This can affect you both positively and negatively. Bankruptcies, missed payments, high debt, and closing accounts can lower your score. Regular timely payments and healthy credit utilization can give you a boost.

How Credit Scores Are Used

Lenders use your score to make decisions about loaning assets to you. Interest rates, loan terms, and offers will all be influenced by your credit history. 

Responsible credit usage results in a higher credit score, which signals to lenders that you'll repay on time. Lenders are motivated to provide better rates, terms, and larger sums to people with higher credit scores.

Your credit report will be evaluated when you apply for new credit, insurance, loans, or as a renter. Landlords, car dealerships, cell phone companies, and utility providers can check your score, too.

What is a Good Credit Score?

The higher your score, the better. Over 700 is good, and anything over 800 is outstanding. Scores in this range earn the best rates from lenders. 

670 is acceptable as a mid-range score. More than two-thirds of the country has a credit score above 670, with the average American scoring between 600 and 750. 

Scores below 669 are considered "subprime" and will be offered less-competitive rates. It can be difficult to get credit if your score is lower than 580.

How to Check Your Credit Score

You're eligible for a free copy of your full credit report once per year from each bureau. Reporting credit bureaus (Equifax, Experian, and TransUnion) accept requests online or via phone (1-877-322-8228). Submit a request every four months to monitor your report for free all year. 

Many banks and credit card companies also provide scores for free through FICO or VantageScore.

Takeaways

1. Your credit score determines which rates and offers lenders will give to you

 

1. Aim for a credit score above 670, although scores below 750 are common

 

1. Your credit score will change over time and good financial behaviors help raise it

 

1. You can get a free credit report 3 times per year (once from each bureau)

Keeping an eye on your credit score is a good financial habit. Regular monitoring shows you how your financial decisions are affecting your score and helps protect you from fraud. 



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