Understanding your credit score

Your credit score is more than just a number — in fact, think of it as a key that can either unlock or lock the doors to financial opportunities that involve credit. Whether you’re applying for a loan, renting an apartment, buying a house or car, or even job hunting, your credit score plays a crucial role in your odds of being approved. 

What exactly is a credit score, and how can you make sure yours is working for you? Let’s break it down.

What is a credit score and why is it important?

A credit score is a three-digit number that reflects your creditworthiness — essentially how likely you are to repay the money you borrow. Lenders like banks and credit card companies use your credit score to decide whether to approve your applications for credit and what interest rates to offer. Credit scores are also widely used by property owners to choose which renters would be best for their rentals. 

A higher score can mean:

• Lower interest rates
• Better loan terms
• Easier approval for credit cards, mortgages, and rentals

How is a credit score calculated?

Credit scores are calculated using several factors from your credit report, which is based on your name and Social Security number. The most common scoring model, FICO, uses the following breakdown to calculate credit scores:

• Payment history, 35%: Do you pay your bills on time? Late payments can harm your credit score, while on-time payment history drives your credit score up.
• Amounts owed, 30%: How much of your available credit are you using? If your credit balances are at or near their maximum, this is seen as a credit risk and lowers your credit score.
• Length of credit history, 15%: How long have your accounts been open? The longer an account remains open, credit bureaus see this as stable credit and your score increases. New credit lines can pull down your credit score.
• Credit mix, 10%: Do you have a variety of credit types (loans, credit cards, etc.)? Diversifying your types of credit improves your credit score.
• New credit, 10%: Have you recently opened or applied for new credit? New inquiries can temporarily lower your credit score.

What are the different types of credit scores?

There are two main types of credit scores:

• FICO Score: Used by most lenders, ranges from 300 to 850.
• VantageScore: Also ranges from 300 to 850 but uses slightly different criteria.

It’s important to note that each of the three major credit bureaus — Equifax, Experian, and TransUnion — may report slightly different scores based on the data they have.

How can you check your credit score and review your reports?

Monitoring your credit score is a good financial practice. Checking your credit score is a soft credit inquiry and won’t affect your credit score. You can check your credit score and review your reports in several ways:

• Free credit monitoring services like Credit Karma or Credit Sesame.
• Credit card providers often provide a free credit monitoring service as part of your cardholder perks.
• AnnualCreditReport.com grants you a free credit report from each bureau once a year.

How can you improve your credit score?

Improving your credit score takes time and consistency, but it’s doable. Here are some steps to get started:

1. Pay bills on time. Set reminders or automate payments. Since on-time payments make up such a large part of your score, it’s important to maintain a solid payment history.
2. Keep credit utilization low. Aim to use less than 30% of your available credit.
3. Avoid applying for too many new accounts. Each application can cause a small dip.
4. Maintain older accounts. A longer credit history helps.
5. Check your credit reports for errors. Dispute any inaccuracies you find.

Understanding your credit score is the first step toward taking control of your financial future. By knowing what affects your score and how to improve it, you can make smarter decisions and open the door to better financial opportunities.