Credit Score How Credit Works

What is a Credit Score?

Joe Cortez
Written by Joe Cortez

No matter where we go and what we do, credit scores continue to follow us around throughout our financial lifetime. At every turn, even sometimes without our knowledge, credit scores help determine when we qualify for credit cards, when we can open accounts, purchase a cell phone, or even continually access the regular credit lines we already have.

Anyone who has opened a checking account with overdraft protection, held a secured credit card, or opened a student loan to pay for college has a credit score issued by at least one of the three major credit bureaus. These numbers are based on the FICO model, and run between 300 and 850. A credit score is much more than a number – rather, this three-digit score, used by an estimated 90 percent of lenders, can determine our worthiness in obtaining new credit cards, shopping for cars, or even buying a home.

While the unified model is supposed to help consumers take better control of their credit scores, many are often confused when they pull their numbers for the first time. What does a credit score actually mean? Moreover, how can consumers better understand and take control of their credit score? Through understanding how to read and interpret a credit score, everyone can get that much closer to achieving their personal financial goals.

Where does my credit score come from?

To begin, calling it a “credit score” as a singular entity is a misnomer. In reality, every consumer has three credit scores, generated by each of the three credit reporting bureaus: Equifax, Experian, and TransUnion.

The score each bureau reports is based on the information reported in turn to them from creditors. Several factors are taken into consideration, which then goes into generating a score as an overall sign of credit health. Although there may be some fluctuation between the three scores, they should reflect a similar score. If one score is significantly lower than the other two (more than 50 points), it may be time to explore the factors on that credit bureau’s report that would cause the lower variation.

How is my credit score generated?

Now that we understand where all three credit scores come from, the next consideration is what factors go into assigning a number to a profile. While the actual algorithm differs between each of the three credit bureaus, the major factors that go into determining a credit score are, in order of importance: payment history, credit utilization, age of credit history, types of credit held, and hard account inquiries.

Payment history is the most important factor because it tells creditors how likely a debtor is to pay off their balance over time, which gives a level of security on new accounts. Those who pay all of their bills on time are on their way to a good credit score, while those who have stumbled along the way may have a less-than-ideal score.

About the author

Joe Cortez

Joe Cortez

Joe Cortez is an award-winning journalist focused on credit and personal finance management. His content has been featured by CNN, The New York Post, The Sun, and USA Today, and has been quoted as an expert by The Street, Bravo TV, and The Weather Channel. In his spare time, he can be found traveling the world on points and miles. For more, follow him on Facebook and Twitter.


  • I bought this for my daughter to build her credit, because she has none. She was refused a credit card.

  • My question deals with a bankruptcy. Three of the banks continue to report 30-90 day past due payments even though the bankruptcy was discharged over two years ago and they have zeroed my balance. Those late payments still show up even though they are no longer being used. Is that fair?

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