Credit Score How Credit Works

What is a Credit Score?

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.

The second-most important factor is credit utilization, or the amount of extended credit currently being used by an individual. Those who are using a majority of their available credit will have a lower credit score, while those who use less than 20 percent of their available credit will have a higher credit score.

The remaining factors – credit history age, types of credit held, and hard account inquiries – hold a lesser role in determining credit score. It is entirely possible to have a high credit score with multiple hard account inquiries, just as it is possible to have a low credit score with a perfect payment history.

How often is my credit score calculated?

For many individuals, life runs on a set schedule. Many of us know when we get paid, when our bills our due, and when our favorite activities take place. However, credit often does not run on a schedule, and many of us find ourselves applying for credit as a result of life circumstances.

Lucky for us, credit scores are calculated on demand, anytime a credit score is pulled by either a creditor or a consumer. In theory, it would be possible to pull 30 different credit reports, and receive 30 different scores based on the most recent information available. This is good news for every consumer, because there is always time to improve a credit report before applying for credit.

I have a credit score – but what does it mean?

After understanding what goes into a credit score, consumers can better understand how to translate their score into actual gains in their financial life. With all the factors considered, each of the three credit bureaus can assign a credit score that ranges from 300 on the low end, all the way to 850 at the highest end. The higher a score is, the better that individual’s credit is assumed to be.

Those who have a score above 700 are considered to have “Excellent” or “Prime” credit. As a result, those with the top credit scores will receive the most competitive rates on home mortgages, car loans, and credit cards. Although scores above 600 are still considered “Good” credit, their rates might be slightly higher than those with “Excellent” credit. Anyone with a score below 600 are considered to have “subprime” credit, meaning they are at a higher risk of paying high interest rates or getting declined for credit altogether.

Why is my “free credit score” lower than my regular credit score?

As a service to their account holders, some credit card providers may often offer “free” credit scores to their customers as part of their benefits. However, these credit scores are often measured on a different scale than the credit scores that decisions are based on.

Instead of traditional FICO scores, many “free” scores are based on the VantageScore 3.0 model. While the VantageScore model uses the same score range (300-850), the major difference is that VantageScore primarily focuses on the past two years of activity. Because of this, many report their “free” credit score is lower than their actual FICO score. Instead of being alarmed, smart consumers should read their VantageScore with the understanding that it considers a smaller data set than the FICO model.

How can I improve my credit score?

The best news about credit scores is that they can constantly be improved over time, so long as consumer realize how their scores are affected. The first major step everyone can take is to pay down balances as quick as possible. By having more available credit, credit profiles become stronger, causing scores to go up.

Other credit score improving techniques are a matter of time. Consumers who do not apply for additional lines of credit and allow negative items to drop over time will have less marks on their credit, allowing their score to rise naturally. Those who want to improve their credit may want to consider monitoring their credit through one of their credit card accounts or signing up for credit monitoring elsewhere.

Although they can be confusing at first, understanding what goes into a credit score can be a simpler process over time. Through knowledge, every consumer can improve their standing and watch their credit extend much further than ever before.

Have any questions about what your credit score is or how it’s calculated? Post them below!

About the author

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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