What Factors Determine a Credit Score?
While the precise formulas used by FICO and VantageScore are proprietary, they both evaluate similar information from your credit report. These factors are weighted differently, but they all play a role in calculating your score.
Based on FICO’s model, the key components are:
- Payment History (35%): This is the most significant factor. A consistent record of on-time payments demonstrates reliability to lenders. Late payments, collections, and bankruptcies can significantly lower your score.
- Amounts Owed (30%): This includes your total debt and your credit utilization ratio—the amount of revolving credit you are using compared to your total credit limit. Experts recommend keeping this ratio below 30% to maintain a healthy score.
- Length of Credit History (15%): A longer history of responsible credit management is generally better for your score. This is why it’s often wise to keep older, well-managed accounts open.
- New Credit (10%): Opening several new accounts in a short time can be a red flag. Each application for new credit can result in a hard inquiry, which may temporarily lower your score.
- Credit Mix (10%): Lenders like to see that you can successfully manage different types of credit, such as installment loans (e.g., mortgages, auto loans) and revolving accounts (e.g., credit cards).
Why Is Your Credit Score Important?
Your credit score directly impacts your financial opportunities. Lenders, landlords, and even some service providers use it to assess risk. A strong credit score can lead to:
- Better Loan and Credit Card Approvals: A higher score increases your chances of being approved for mortgages, auto loans, and credit cards.
- Lower Interest Rates: A strong credit history often qualifies you for lower interest rates, which can save you thousands of dollars over the life of a loan.
- Easier Rental Applications: Landlords frequently check credit to determine if an applicant is likely to pay rent on time.
- Lower Insurance Premiums: In many states, insurers use credit-based scores to help set premiums for auto and homeowners insurance.
- Utility Service Deposits: Utility companies may waive security deposits for customers with good credit.
Understanding Credit Score Ranges
Scores are categorized into ranges that help lenders quickly assess creditworthiness. While models vary, FICO scores are generally grouped as follows:
| Score Range | Rating | Lender Perspective |
|---|---|---|
| 800-850 | Exceptional | You are considered a low-risk borrower and will likely qualify for the best available interest rates and terms. |
| 740-799 | Very Good | You are a reliable borrower and will likely be approved for most loans with favorable terms. |
| 670-739 | Good | You are seen as an acceptable risk. You will generally qualify for standard loans and credit products. |
| 580-669 | Fair | You may be approved for credit but likely with higher interest rates and less favorable terms. |
| 300-579 | Poor | You are considered a high-risk borrower, making it difficult to get approved for new credit. |
Source: Experian, 2025 data.
How to Improve Your Credit Score
Building and maintaining good credit is an ongoing process. The following habits are essential for improving your score over time:
- Pay All Bills on Time: Set up automatic payments or calendar reminders to ensure you never miss a due date.
- Maintain a Low Credit Utilization Ratio: Aim to use less than 30% of your available credit limit on your credit cards.
- Regularly Monitor Your Credit Report: You can request a free credit report from each of the three major bureaus (Equifax, Experian, and TransUnion) annually at AnnualCreditReport.com. Review it for errors and dispute any inaccuracies.
- Avoid Opening Unnecessary Accounts: Only apply for new credit when you truly need it to limit the number of hard inquiries on your report.
- Consider a Credit-Building Tool: If you are new to credit or rebuilding your score, a credit-builder loan can help you establish a positive payment history.
Common Myths About Credit Scores
- Myth: Checking your own credit hurts your score.
Fact: Checking your own credit is a “soft inquiry” and has no impact on your score. A “hard inquiry,” which occurs when a lender checks your credit for an application, can cause a small, temporary dip. - Myth: You need to carry a balance on your credit card to build credit.
Fact: You do not need to pay interest to build credit. Paying your balance in full every month is the most effective way to demonstrate financial responsibility. - Myth: Closing old credit cards is good for your score.
Fact: Closing an old account can shorten your credit history and increase your credit utilization ratio, both of which can lower your score.
For more information on understanding your credit, you can visit the Consumer Financial Protection Bureau.
Sources:
- What’s in My FICO® Scores? (myFICO)
- What Is a Good Credit Score? (Experian)