What is a credit score, really?

By Gina Freeman

Reviewed by Kimberly Rotter

Nov 13, 2023

Read time: 7 min

Pregnant women checking her finances and credit

Key takeaways:

  • Credit scores are based on your track record with credit—your borrowing and payment history.

  • The way credit scores are calculated is secret, but we can help you decode them.

  • Understanding the basics can help you have a good credit score.

Financial wisdom isn’t about how much you already know. It's about learning, growing, and improving. Knowing and protecting your credit score could help you make better financial decisions and, ultimately, keep more money in your pocket. So let’s break down what a credit score is (and isn’t), so you can take control of yours and use it to improve your finances.

Your credit score

What is a credit score, anyway? It’s a snapshot that gives an overall summary of your track record with credit. That snapshot is accurate at the moment it’s created. Your score can—and does—change every time new information appears on your credit reports. 

Here's how it works.

Most larger creditors and many smaller creditors report your account information to one or more of the three major credit bureaus: Equifax, Experian, and TransUnion. This is where your credit reports come from. 

Every time you apply for credit, borrow money, make or miss a payment, lose a lawsuit, file bankruptcy, or change the balance on your credit card, this activity will probably be reported to at least one credit bureau. Businesses can access this information by ordering a credit report. 

Each credit bureau is a separate company, and some creditors report at different times or don’t report to all three. That’s why your credit reports can vary. It’s important to understand that your credit reports are information only. Your credit score is separate, and it’s based on the information in your credit reports.

Why are credit scores important?

In a nutshell, credit scores tell lenders how likely you are to repay your debts. 

Lenders rely on credit scoring to determine who they will do business with, and what interest rates and fees they’ll charge.

Other industries use credit scoring, too. Landlords can check credit scores when evaluating potential tenants. In some states, insurers rely on special insurance-based credit scores to decide who to insure and how much they’ll pay. 

Your credit score can make it easier or more difficult for you to borrow and do business, and it can affect how much you pay for financial products like loans, credit cards, and car insurance. 

Credit scores are equal-opportunity and blind to personal and economic differences. Anyone can follow the same steps to earn a good credit score. 

Where does credit scoring come from?

A special formula is applied to the information in your credit reports to generate a score. This formula is called a “credit scoring model.” It’s a complex algorithm, and the credit bureaus don’t share it. But they do share some general information about how they come up with scores. 

Credit scoring components

What information influences your credit score? The most common credit scoring models, FICO® and VantageScore®, consider these factors:

  • Payment history (whether you make payments consistently and on time)

  • How much you owe and how much available credit you have ( credit utilization)

  • Length of credit history (how long you’ve had access to credit)

  • New credit (accounts recently opened or recent credit applications)

  • Credit mix or credit depth (the types of credit you have experience with)

FICO and VantageScore weigh these factors slightly differently. Your credit score can vary depending on which credit bureau's information is used and which credit scoring model is applied. 

VantageScore vs FICO

FICO predates VantageScore

The FICO score was created by Fair, Isaac, and Company and introduced in 1989. Over three decades, the model has changed many times, and there are different versions in use today. 

The VantageScore was created by Equifax, Experian, and TransUnion working together, and it was introduced in 2006. 

More creditors rely on your FICO score, but a few thousand creditors use your VantageScore. You don’t have to do anything differently. If you have one kind of score, you already have both.

VantageScores are easier to get for those new to credit

To have a FICO score, you need to have at least one credit account that’s been open for at least six months. You also need to have one account reported to a credit bureau within the past six months. (The same account can satisfy both requirements.) Also, there can be no indication of “deceased” on your credit report. 

You can get a VantageScore if you have at least one account reported, even if it's been open for less than six months. Again, no “deceased” notation.

Credit score factors are treated differently

When you shop for a mortgage, auto loan, or student loan, it’s smart to compare offers. But normally, each time someone checks your credit, your score can drop by a few points. That’s why in these scenarios, FICO allows you to shop around without excess damage to your credit score. All credit inquiries from the same kind of creditor count as a single inquiry, as long as they happen within 45 days.

For everything except mortgage inquiries, VantageScore gives you a much smaller shopping window of 14 days. However, VantageScore applies its rate-shopping window to more types of financing, including credit cards.

FICO doesn’t count collection accounts under $100. VantageScore doesn’t count paid collections, but includes all unpaid collections regardless of the amount.

How credit scores are calculated

VantageScore and FICO scores range from 300 to 850. In both scoring models, payment history and credit utilization have the most influence. Here's how FICO and VantageScore weight the various factors that affect your score:

What’s in FICO scores

  • Payment history (35%)

  • Amounts owed, aka credit utilization (30%)

  • Length of credit history (15%)

  • New credit (10%)

  • Credit mix (10%)

What’s in VantageScores

  • Payment history (41%)

  • Credit utilization (20%)

  • Depth of credit, aka credit mix (20%)

  • Recent credit (11%)

  • Balances (6%)

  • Available credit (2%)

Don’t worry too much about the differences. Both scoring models reward the same things—making payments on time, and keeping balances low. 

Don’t fall for these credit score myths

Credit scoring formulas are closely guarded by the companies that created them, and that's led to some common misperceptions. 

  • “Credit scores include everything about you”

Credit scores don’t include your income, bank balances, home value, age, race, employment status, use of public assistance, marital status, family size, driving record, or criminal record. 

Credit scores do count open and closed accounts, inquiries when you apply for credit, balances, and payments, collections, repossessions, and public records like tax liens, foreclosures, and judgments. 

  • “Payment history goes away if you close an account”

Payment history stays on your credit report and influences your credit score for seven years (delinquencies and collections) or ten years (accounts closed in good standing). However, recent activity is weighed much more heavily than older entries. 

  • “Married couples have a joint credit score”

Each spouse’s credit score is calculated according to what’s in their individual credit file. Joint accounts may show up on both credit reports, but there's no joint credit score.

  • “Credit can be fixed with tricks”

There’s an entire shady industry built on this myth, often by suggesting you use a “credit privacy number” (or CPN) they sell you in place of your social security number. Evading your past by using a CPN on a loan application is likely to get you into legal trouble. Misrepresenting your Social Security number on credit applications is fraud and a federal crime. Also, many CPNs are stolen Social Security numbers. Using one in that case could implicate you in identity theft. No one can remove accurate information from your credit file. 

What’s good credit?

There's no universal definition of “good credit,” but 680 is a popular benchmark. Lenders determine what “good” means in their underwriting guidelines, although there are some norms in different industries. Here are a few:

  • Poor (16%): Scores under 580 are widely considered “poor.’ About 16% of people fall in this range.

  • Fair (18%): The minimum credit score for most mortgages ranges from 620 to 680. The minimum score for an FHA loan with 3.5% down is 580. According to Experian, that covers the “fair credit” range, which runs from 580 to 669. Just under 20% of people have fair credit. 

  • Good (21%): Experian defines good credit scores as 670 to 739, and just over 20% of people are in that range. Good credit scores provide access to most mainstream credit cards, personal loans, auto loans, and home loans. The average credit score in the US is in this range.

  • Very Good (25%): Having “very good credit,” 740 to 799, gets you access to the best interest rates and terms if you meet other requirements like verifiable income. One in four Americans has very good credit.

  • Exceptional/Excellent (20%): Scores between 800 and 850 are considered exceptional or excellent. But at this level, it’s more about bragging rights than additional access to credit. You generally can’t get a deal with an 800 credit score that you couldn’t get with a 760. About one-fifth of people earn scores in this range, and just over 1% have the highest possible score.

How hard is it to change your credit score?

It’s not that difficult to improve your credit score.

  • Always pay on time. Setting up automatic bill payments can help.

  • Keep credit card balances low. High credit card balances can lead to lower credit scores. 

  • Keep accounts open. Older accounts can help you improve your credit.

  • Try not to apply for lots of credit in a short time. Only apply when you need to. 

Don’t apply for a new loan or credit card just to improve your credit mix. It’s true that credit scores consider the variety of credit products you’ve used, but that variety comes naturally over time for most people. Think student loan, credit card, car loan, mortgage. You don’t need to force it. 

In general, healthy finances and good credit scores go hand in hand. Using credit conservatively reduces what you pay in interest and frees up more money for saving, investing, and having fun. 

What’s next

  • Check your credit score online. Your credit card issuer may offer this benefit. Equifax and Experian also offer free credit scores. You don’t need to provide a credit card number or sign up for paid credit monitoring.

  • Look at the factors affecting your score. Most free credit score providers include a helpful credit score analysis. 

  • Improve what you can. If your payment history needs work, set up automatic payments or reminders. If your credit utilization is high, lower it by paying down balances or applying for a credit increase. 

If you’re struggling to bring your credit card balances down, talk with an Achieve debt expert who could help you choose a strategy to get rid of your debt.

Gina Freeman - Author

Gina Freeman has been covering personal finance topics for over 20 years. She loves helping consumers understand tough topics and make confident decisions. Her professional history includes mortgage lending, credit scoring, taxes, and bankruptcy. Gina has a BS in financial management from the University of Nevada.

kim rotter 2022 2

Kimberly is Achieve’s senior editor. She is a financial counselor accredited by the Association for Financial Counseling & Planning Education®, and a mortgage expert for The Motley Fool. She owns and manages a 350-writer content agency.

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