Your One-Stop Shop For How Credit Scores Work (2024)

Whether you’re shopping for the best loan terms or applying for a new apartment lease, your credit score is likely to come into play. This is because credit scores demonstrate your overall creditworthiness and likelihood of on-time payments. To optimize your score and increase your chances of approval, it’s necessary to understand how this crucial number is calculated and what you can do to improve it.

To help, we created a one-stop shop for credit score resources, including ranges, how they work and what you can do to build your credit profile.

What Is a Credit Score?

A credit score is a number that represents the risk a borrower poses to a lender or, in other words, how likely that borrower is to repay a loan on time. In general, credit scores range from 300 to 850, with higher scores earning borrowers greater approval odds and more competitive rates.

Types of Personal Credit Scores

Generally speaking, there are two major credit scoring companies—FICO and VantageScore—each with its own scoring models. Score ranges are the same for the most common models, but there are some differences between the criteria considered in each calculation. Likewise, each scoring convention pulls information from a different combination of bureaus and imposes its own minimum scoring requirements.

For example, VantageScore was created by the three major credit bureaus, so each consumer has a single VantageScore. In contrast, FICO has bureau-specific scoring models that can vary depending on the information in a borrower’s Experian, Equifax and TransUnion reports.

The two major scoring models also treat new borrowers differently. To generate a score, FICO requires borrowers have an account that’s six months or older plus activity on an account within the last six months. VantageScore can calculate a credit score as long as the consumer has at least one account—regardless of its age.

How Credit Scores Work

Credit scores dictate whether someone is likely to qualify for everything from credit cards to car loans, mortgages and apartment leases. Lenders also use a borrower’s credit score to determine the interest rate and down payment it requires. Scores may even be used when opening new accounts with local utilities to evaluate the likelihood of a customer making on-time bill payments.

FICO and VantageScore provide the most common scoring models, which are based on information reported by the three main credit bureaus—Experian, Equifax and TransUnion. Each scoring model assigns weight to various factors that represent a borrower’s creditworthiness, including payment history, outstanding balances and length of credit. However, individual lenders may also calculate scores based on their own proprietary algorithms.

Credit Score Ranges

Industry-specific FICO scores range from 250 to 900, but FICO-based scores and VantageScore versions 3.0 and 4.0 each range from 300 to 850. A credit score of 700 or higher is generally considered good, while one that exceeds 800 is excellent. However, there are slight differences in how each scoring convention categorizes consumers. The most commonly used FICO Score and VantageScore ranges are as follows.

However, keep in mind that what constitutes a good credit score can also depend on the lender and type of loan. To help you navigate these differences, many lenders offer a prequalification process that can predict approval odds and whether you’re likely to get a competitive rate.

How Credit Scores Are Calculated

Credit scores are calculated according to FICO and VantageScores’ algorithms and based on information collected by the three major credit bureaus. These are the five factors that make up your FICO credit score.

Payment History—35%

Payment history is the most important factor that goes into a consumer’s credit score, accounting for 35% of the calculation. When evaluating a borrower’s creditworthiness, scoring models look for late payments and then consider the degree of lateness, number of tardy payments and how long ago the late payments were made.

While an isolated late payment isn’t likely to damage your credit score dramatically, it may still be impactful. On the other hand, demonstrating a pattern of late payments—or making payments more than 60 days late—is more harmful. Strengthen this portion of your credit score by making consistent, on-time payments and disputing any late payments that you believe are errors.

Accounts Owed—30%

Next to payment history, 30% of a consumer’s FICO credit score is based on the total amount of outstanding debt—or accounts owed—a borrower has on their credit report. To evaluate this, scoring models look at the consumer’s total debt, number of accounts with balances, credit utilization ratios and types of accounts, like credit cards, mortgages and student loans.

You can bolster this component of your credit score by paying down credit balances and limiting future use of your cards. Likewise, stay on top of payments on installment loans (e.g., auto loans and mortgages) to keep your balances under control.

Length of Credit History—15%

A consumer’s credit history length accounts for 15% of their credit score, making it the third most impactful factor. To evaluate the length of a borrower’s credit history, the scoring models identify the average age of all accounts; the ages of the oldest and newest accounts; the length of time each account has been open; and the date on which each account was last active.

For this reason, it’s best not to close older accounts in good standing—especially if you plan to apply for a mortgage or other large loan soon. Improving this aspect of your score typically requires time and patience. That said, becoming an authorized user on an older account in good standing may help you boost the age of your credit and improve your score.

Credit Mix—10%

A borrower’s credit mix is the combination of credit cards, loans and other accounts. Scoring models reward borrowers for having a variety of account types, though the factor only accounts for 10% of a credit score calculation. This includes both revolving credit, like credit cards, and installment accounts such as personal loans and mortgages.

To make the most of this factor, review your credit report and identify gaps in your credit mix. For example, it may be helpful to open a new credit card if you don’t have any revolving accounts on your credit report. Borrowers without any installment loans can benefit from applying for a small personal loan and making regular, on-time payments.

New Credit—10%

When evaluating a borrower’s overall creditworthiness, scoring models also look at recent inquiries—or credit checks. This category, which only accounts for 10% of a consumer’s credit score calculation, also includes how many new accounts are on the borrower’s credit report and when they were opened.

In general, borrowers who open multiple credit accounts at the same time pose more risk to lenders, making them less attractive. So, while new credit isn’t as impactful as other variables, it’s still helpful to limit new inquiries on your report if you’re planning to apply for an auto loan or mortgage soon.

How to Improve Your Credit Score

Building your credit profile can be a slow and frustrating process. Fortunately, you can take some steps to stay on top of your finances and strengthen your creditworthiness. Consider these tips to improve your credit score:

• Make consistent, on-time payments
• Inquire about a credit increase on your existing accounts
• Review your credit report and dispute any errors
• Apply for one of the best first credit cards to build credit
• Keep your accounts open, especially older accounts in good standing
• Use a credit monitoring service to track your score and keep an eye out for red flags that might signal identity theft