Credit Scores Explained: What Goes Into the Number

A credit score is a number that summarizes how likely you are to repay borrowed money, based on the information in your credit reports. Lenders may use it when deciding whether to approve you and on what terms. Landlords, insurers, and utility companies may also look at it in some situations. Understanding the basics can help you make decisions with a clearer picture.

What a credit score is, and is not

A score is calculated by a formula, and different scoring models exist. That is why you may see more than one number for yourself depending on where you look. The score is not a measure of your income, your character, or your net worth. It reflects your credit behavior as recorded by credit reporting companies.

Scores usually fall within a range, with higher numbers indicating lower risk to lenders. The exact ranges and labels depend on the model, so check the explanation provided with your score.

The main factors

Scoring models differ in details, but most weigh a similar set of factors.

Payment history

This is generally the most important factor. Paying on time, every time, is the single best habit. Late payments, accounts sent to collections, and certain public records can lower scores, and more recent or more severe problems typically weigh more.

Amounts owed and credit utilization

Utilization compares your revolving balances with your credit limits. Using a smaller portion of your available credit is generally viewed more favorably than using most of it. This factor can change quickly as balances change.

Length of credit history

Models may consider the age of your oldest account, your newest account, and the average age of all accounts. Time is on your side when you keep older accounts in good standing.

Credit mix

Having experience with different types of credit, such as revolving accounts and installment loans, can play a small role. You do not need to borrow just to diversify.

New credit

Applying for several accounts in a short time can create multiple hard inquiries and new accounts, which may temporarily lower your score.

Common myths

• Checking your own score hurts it. Looking at your own credit is a soft inquiry and does not lower your score.
• Carrying a balance helps your score. You do not need to pay interest to build credit. Paying in full is fine.
• Closing old cards always helps. Closing an account can reduce your available credit and shorten your history over time, which may hurt.
• Income is part of the score. Income is not a factor in credit scores, though lenders may consider it separately.

Habits that support a healthy score

• Pay every bill on time, using autopay as a safety net.
• Keep revolving balances low compared with limits.
• Avoid applying for credit you do not need.
• Review your credit reports regularly for errors.
• Be patient. Negative items generally lose weight as time passes, and positive habits build gradually.

Building credit from scratch

If you have little or no history, you might consider a secured card, a credit-builder loan from a bank or credit union, or becoming an authorized user on a trusted person's account. Make sure that any product reports to the credit reporting companies, and avoid anything that charges high fees up front.

Where to check

You can get free credit reports through the official federal source. Many banks, card issuers, and nonprofit organizations also provide free scores to customers. Be wary of services that require payment details for a so-called free score, and remember that lenders may use a different model than the one you see.

Repairing a damaged score takes time, and no company can legally remove accurate negative information just for a fee. A nonprofit credit counselor can help you build a realistic plan.

The takeaway: your credit score reflects your history of paying bills, how much credit you use, how long you have used it, and how often you apply. You cannot change the past, but steady, simple habits can improve the picture over time.