Here’s what your credit score really means (2024)

Your credit score is an important part of your overall financial picture. It can influence everything from your ability to buy your dream home to your ability to land your dream job. It determines how much money you can borrow and how much interest you’ll end up paying.

But how well do you understand it?

If you’re confused about what your credit score means and how it’s created, you’re not alone— a 2019 survey found that 4 in 10 Americans had no idea how their credit score is determined. Since monitoring your credit report is one of the keys to financial wellness, it’s important to have at least a basic understanding of how your credit score works.

Member tip: To help Americans manage their credit throughout the pandemic, we’re all entitled to a free credit report from each credit bureau every week until April 20, 2022. Knowing what factors influence your score can help you understand what’s in your credit report and pinpoint areas that need improvement.

What’s a credit score?

Your credit score is a number that represents how risky you are as a borrower. The higher your score, the more you signal to potential lenders that you’re a responsible person who’s likely to pay back your loan.

Most people have several different credit scores, each assigned by a different credit bureau, but FICO is the most widely used score. FICO scores range from 300 to 850 points. A good score falls in the 661 to 780 range, while a score under 500 is considered poor.

According to FICO, you receive a credit score when you have at least one credit account open for six months. Once a score has been established, you’ll start building credit history and your score will increase or decrease based on data from five categories: payment history, the length of credit, amounts owed, credit mix and new credit.

Payment history

Paying your bills on time every month is one of the most important things you can do to influence your credit score. That’s because 35% of your score is based your payment history, which includes the following accounts:

  • Credit cards
  • Retail accounts
  • Installment loans
  • Finance company accounts
  • Mortgages

While making your payments on time will help your score, a late payment won’t necessarily cause lasting damage. For instance, paying a mortgage late only once won’t affect your score that much, whereas frequent late payments can severely damage your credit with lenders.

Current debt

The amount of debt you carry is the second-biggest factor, influencing 30% of your score. Whenever your credit is checked, FICO looks at the amount you owe on all accounts, the amounts owed on different types of accounts, the percentage of available credit you’re using and how many of your accounts have balances.

If you’re already paying your bills on time, reducing your debt load so you’re using 30% or less of your available credit is the biggest step you can take to improve your credit score. One way to keep chipping away at your debts over time is to use the 50-30-20 budget rule.

Length of credit history

The moment you open your first credit account, the clock starts ticking on your credit history. A longer credit history generally has a positive impact on your credit score. This factor determines 15% of your score, and it’s the only part of your score you can’t improve through direct action. Fortunately, time is on your side.

Mix of credit

While it’s not a significant factor in determining your credit score, having a healthy mix of different types of credit—and managing them responsibly—signals to lenders that you can handle the terms of different types of loans. This factor comprises 10% of your credit score.

The key is to have credit cards as well as other types of loans. It’s also worth noting that a closed account will still show up on your credit history and be considered in your FICO score, so it’s better not to close any accounts if you can help it.

New credit

The last 10% of your FICO score is determined by any new credit you’ve opened recently. For instance, if you suddenly open several new accounts is a short period of time, your score may take a hit depending on what type of credit you applied for.

When a lender checks your credit to see if you qualify for a loan (known as a hard inquiry), it can lower your credit score. However, that doesn’t mean your score will drop every time your credit is checked. You can check your own credit report (known as a soft inquiry) as often as you like without consequence—and we highly recommend you do so.

What’s NOT in your credit score

Now that you know how your credit score is determined, it may help to note what aspects of your life are not reflected in your score. These include:

  • Race
  • Color
  • Religion
  • National origin
  • Sex
  • Marital status
  • Age
  • Salary
  • Occupation
  • Employment history
  • Where you live
  • What interest rate you pay on your credit card
  • Child or family support obligations
  • Participation in credit counseling

Keep in mind that your credit score is only a snapshot of a financial moment in time. It can and will change—and that means you can take steps to improve it. It will take time, but it’s worth it for your overall financial wellness.

If you need help understanding your credit score or creating a strategy for improving it, contact our team for a financial planning meeting. We’re here to help guide you through it.

Here’s what your credit score really means (2024)

FAQs

Here’s what your credit score really means? ›

A credit score is a three-digit number, usually on a scale of 300 to 850, that estimates how likely you are to repay borrowed money and pay bills. Credit scores are calculated from information about your credit accounts.

What does your credit score actually mean? ›

A credit score is a prediction of your credit behavior, such as how likely you are to pay a loan back on time, based on information from your credit reports.

How rare is an 800 credit score? ›

According to a report by FICO, only 23% of the scorable population has a credit score of 800 or above.

How much is an 850 credit score worth in money? ›

Distribution of FICO Scores Among U.S. Consumers
Characteristics of Consumers With 850 FICO® Scores
Average for All ConsumersAverage for Consumers With an 850 FICO® Score
Retail credit card balance$1,188$194
Auto loan balance$23,792$19,296
Mortgage balance$244,498$245,710
7 more rows
May 20, 2024

What are the 5 levels of credit scores? ›

Credit score ranges and what they mean will vary based on the scoring model used to calculate them, but they are generally similar to the following:
  • 300-579: Poor.
  • 580-669: Fair.
  • 670-739: Good.
  • 740-799: Very good.
  • 800-850: Excellent.

What is the highest credit score to buy a house? ›

There's no single, specific credit score that will automatically qualify you for a mortgage (though having the maximum score of 850 certainly never hurts). However, while lenders might not set precise qualifying numbers, they do have minimum credit score requirements.

How to get 800 credit score? ›

Making on-time payments to creditors, keeping your credit utilization low, having a long credit history, maintaining a good mix of credit types, and occasionally applying for new credit lines are the factors that can get you into the 800 credit score club.

How rare is 900 credit score? ›

It's exceedingly rare for anyone to have a credit score over 900, as most credit scoring models have a maximum limit of 850, and even achieving that score is uncommon.

Is 600 a good credit score? ›

Your score falls within the range of scores, from 580 to 669, considered Fair. A 600 FICO® Score is below the average credit score. Some lenders see consumers with scores in the Fair range as having unfavorable credit, and may decline their credit applications.

Is 900 a good credit score? ›

While older models of credit scores used to go as high as 900, you can no longer achieve a 900 credit score. The highest score you can receive today is 850. Anything above 800 is considered an excellent credit score.

Who has the highest credit score ever? ›

Pavelka, 56, has a credit score of 848 out of 850. The letter he got from the credit bureau recently said his score "ranks higher than 100 percent of U.S. consumers." That makes Pavelka a financial anomaly. While an 848 isn't a perfect score, it's as high as most experts have ever seen.

Can I buy a house with a 675 credit score? ›

What is a good credit score to buy a house? A credit score to buy a house doesn't have to be perfect. In fact, the minimum credit score to buy a house can be as low as 580, which falls into the “fair credit” category. With a credit score of 620 or higher, you're eligible for most types of mortgages.

What is the average credit score by age? ›

Consider yourself in “good” shape if your credit score is above the average for people in your age group. Given that the average credit score for people aged 18 to 26 is 680, a score between 680 and 690 (the average for people aged 27 to 42) could be considered “good.”

What habit lowers your credit score? ›

Having Your Credit Limit Lowered

Recurring late or missed payments, excessive credit utilization or not using a credit card for a long time could prompt your credit card company to lower your credit limit. This may hurt your credit score by increasing your credit utilization.

What is a decent credit score to buy a car? ›

Your credit score is a major factor in whether you'll be approved for a car loan. Some lenders use specialized credit scores, such as a FICO Auto Score. In general, you'll need at least prime credit, meaning a credit score of 661 or up, to get a loan at a good interest rate.

How can I boost my credit score fast? ›

What actions you can take to boost your credit scores?
  1. Review your credit reports for errors and dispute any inaccuracies. ...
  2. Keep paying your bills on time. ...
  3. Improve your credit mix. ...
  4. Improve credit utilization. ...
  5. Read more.

Is Credit Karma your actual score? ›

The credit scores and credit reports you see on Credit Karma come directly from TransUnion and Equifax, two of the three major consumer credit bureaus. They should accurately reflect your credit information as reported by those bureaus — but they may not match other reports and scores out there.

Is 700 a good credit score? ›

For a score with a range between 300 and 850, a credit score of 700 or above is generally considered good. A score of 800 or above on the same range is considered to be excellent. Most consumers have credit scores that fall between 600 and 750. In 2023, the average FICO® Score in the U.S. reached 715.

What is a good credit score for my age? ›

What is a good credit score for your age? You might consider your score to be good if it meets or exceeds the average for your peers, but that isn't the best gauge. Following NerdWallet's general guidelines, a good credit score is within the 690 to 719 range on the standard 300-850 scale, regardless of age.

Is 750 a good credit score? ›

A 750 credit score is considered excellent and above the average score in America. Your credit score helps lenders decide if you qualify for products like credit cards and loans, and your interest rate. A score of 750 puts you in a strong position.

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