As you get older, a good credit score becomes more and more important in your life. But first, you need to know what a credit score is. Determined by various factors, a credit score is a digital number assigned to a person indicating their ability to repay a loan to lenders. Credit scores are determined by a credit scoring model and usually fall between the range of 300 to 850. Your score can help you qualify for loans, get lower interest rates, purchase a car or home, get a credit card, rent an apartment, or even get a job. If you're unfamiliar with any of the credit card terms used below, read our Credit Card Terminology Cheat Sheet.
What determines my credit score?
Your credit score is determined by your payment history, total amount of debts owed, length of credit, types of credit, and number of inquiries. While each of these factors contribute to generating your credit score, the three primary credit reporting agencies–Experian, TransUnion, and Equifax–may consider different factors to be the most important. Paying attention to each of these factors that affect your credit score can help you implement positive financial habits in your everyday life.
1. Payment history
Payment history is often considered to be one of the most important factors that determines your total score. Even the slightest slip up can cause your credit to take a hit. A positive payment history shows lenders your ability to not only repay the debt, but also repay the debt on time. If you don't make a payment because you can't afford it, your credit score will begin to reflect that.
2. Total amount owed
Your total amount of credit owed is another significant contributor. This includes credit card debt, student loans, and more. That's why it's important to manage your total debt and know your credit utilization ratio. This is a ratio that adds up all your credit card balances and divides that amount by your total credit limit–the lower the number, the better. Utilizing all of your available credit at once could have the potential to hurt your score.
3. Length of credit history
The length of your credit history, also called your credit age, plays a role in your credit score as well. This is because the longer the history, the more experienced you likely are with managing credit. The length of your credit history will typically be made up of three different things: how long your accounts have been open; how long specific accounts have been open, such as a student loan; and how long it has been since a particular account has been used.
4. Types of credit
Different types of credit can play a role in your score too. Handling multiple accounts at once, such as a student loan, an auto loan, and a credit card, can show lenders that you are very responsible with your credit. If you continue to pay off your loans as planned, this may show lenders that you are less of a risk because you're able to successfully manage the mix of credit accounts. However, make sure that you’re able to divide your attention between the accounts effectively. If you’re just starting out, it’s better to focus on managing one account well, rather than having four subpar credit accounts.
5. Number of hard inquiries
Finally, applying for new accounts on a frequent basis can make you appear risky or financially irresponsible to lenders. In other words, it may look like you weren't successful with managing the credit you had responsibly, so now you need more. While they may grant it to you, it could decrease your credit score for a period of time. The fewer hard inquiries, the better. Therefore, apply for credit only when you need to.
Can I have more than one credit score?
Yes, there are various types of credit scores that a single person can have. Recall that each credit bureau may collect information and emphasize different factors to help determine your creditworthiness. Sometimes, the credit score ranges will vary depending on the type, but they tend to be close in number. There are different ranges of credit scores. Scores on the low end of the scale are poor, while those on the high end are excellent. Below are the credit ranges for a FICO score, which is commonly used by lenders.
- Excellent: 800-850
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 300-579
What else should I know about credit scores?
If you’ve never had a credit card or student loan account in your own name, you may not have a credit score yet. You will need at least a few months of activity on your credit account before you’ll be assigned a FICO score. Once you begin to build a credit history, you’ll want to regularly scan your credit reports for inaccurate information. If you find an error, try to file a dispute with the credit bureau as soon as possible, as it could negatively impact your score otherwise.
Additionally, you do not need to carry a monthly credit card balance to build your credit. This is one of the many credit card myths that could negatively influence your financial management. As a current or future credit cardmember, it's important to understand credit scores and how your financial habits affect them.
Now that you know the credit basics, it’s time to start building credit in college and beyond. While it takes some effort, you can improve your credit score in no time. Whether you’re applying for student loans or buying a new vehicle, having good credit just makes achieving your financial goals easier.