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Your credit score is one of the most important numbers in your financial life — yet most people have no idea how it’s actually calculated. They know a higher score is better and a lower score is worse, but the mechanics behind the number remain a complete mystery.
I was in the same position for years. I knew my credit score existed and that it mattered, but I didn’t understand how credit scores work until I’d already damaged mine through mistakes I could have avoided. Understanding the scoring system earlier would have saved me years of financial setbacks.
The good news is that how credit scores work isn’t complicated once someone breaks it down. This guide explains exactly what goes into your score, what the ranges mean, and what you can do to build and protect it.
What Is a Credit Score?
A credit score is a three-digit number that represents your creditworthiness — essentially, how likely you are to repay borrowed money based on your financial history. Lenders, landlords, insurers, and sometimes employers use this number to make decisions about you.
The most widely used credit scoring model is the FICO score, created by the Fair Isaac Corporation. Your FICO score ranges from 300 to 850, with higher scores indicating lower risk to lenders.
There’s also the VantageScore, developed jointly by the three major credit bureaus (Equifax, Experian, and TransUnion). VantageScore uses the same 300-to-850 range and considers similar factors, though the weighting differs slightly.
When most people talk about their “credit score,” they’re referring to their FICO score, since it’s used in approximately 90% of U.S. lending decisions.
Credit Score Ranges: What the Numbers Mean
Understanding where your score falls helps you know where you stand and what opportunities are available to you:
800-850: Exceptional. You qualify for the best rates and terms on virtually everything. Lenders see you as an extremely low-risk borrower.
740-799: Very Good. You’ll qualify for better-than-average rates on loans and credit cards. Most premium rewards cards are accessible at this level.
670-739: Good. This is considered the threshold for “good” credit. You’ll qualify for most credit products, though not always at the best rates.
580-669: Fair. You may be approved for credit, but with higher interest rates and less favorable terms. Many premium cards will be out of reach.
300-579: Poor. Approval for traditional credit products is difficult. You’ll likely need secured credit cards or credit-builder loans. Interest rates on any approved credit will be high.
Every point matters, but the biggest lifestyle changes happen at the thresholds — crossing from “fair” to “good” or from “good” to “very good” opens significantly better financial opportunities.
The 5 Factors That Determine Your Credit Score
Your FICO score is calculated using five categories of information from your credit report. Understanding these factors is the key to understanding how credit scores work — and how to improve yours.
Payment History (35%)
This is the single most important factor. It tracks whether you pay your bills on time, how late any missed payments were (30 days, 60 days, 90+ days), and how recently any late payments occurred.
A single payment that’s 30+ days late can drop your score significantly — sometimes by 50 to 100 points or more. Late payments stay on your credit report for seven years, though their impact diminishes over time.
This is why I consistently emphasize in my credit card tips for beginners guide that paying on time is the most important habit you can build. Set up autopay to ensure you never miss a payment.
Credit Utilization (30%)
Credit utilization measures how much of your available credit you’re using. It’s calculated by dividing your total credit card balances by your total credit card limits.
If you have two cards with a combined $5,000 limit and carry a total balance of $1,500, your utilization is 30%.
Below 30% is generally recommended. Below 10% is ideal for maximizing your score. Utilization is calculated both per-card and across all cards.
The good news about utilization is that it has no memory. Unlike late payments, high utilization only affects your score for as long as the high balance is reported. Pay down your balance, and your score can recover within one to two billing cycles.
Length of Credit History (15%)
This factor considers the age of your oldest account, the age of your newest account, and the average age of all your accounts. Longer credit histories are better because they give lenders more data to evaluate your behavior.
This is why closing old credit card accounts can hurt your score — it removes account age from your profile. Even if you never use an old card, keeping it open with a zero balance helps your average account age.
Credit Mix (10%)
Lenders like to see that you can manage different types of credit responsibly. Your credit mix considers the variety of accounts you have, such as credit cards (revolving credit), auto loans (installment credit), mortgages, and student loans.
You don’t need to take on debt just to improve your credit mix. But having a combination of account types, managed well, is better than having only one type.
New Credit Inquiries (10%)
Every time you apply for new credit, the lender pulls your credit report, creating a “hard inquiry.” Each hard inquiry can lower your score by 5 to 10 points.
Multiple inquiries in a short period can signal financial distress to lenders. However, the scoring models recognize rate shopping — multiple inquiries for the same type of loan (mortgage, auto, student) within a 14-to-45-day window are typically counted as a single inquiry.
Hard inquiries stay on your report for two years but only affect your score for about 12 months.
Your Credit Report vs. Your Credit Score
These are related but different. Your credit report is the detailed record of your credit history — every account, payment, inquiry, and public record. Your credit score is a number calculated from the information in your credit report.
You can access your credit report for free once per year from each of the three major bureaus. Review it regularly to check for errors — incorrect late payments, accounts you don’t recognize, or outdated information can drag your score down unfairly.
If you find errors, dispute them with the bureau. Correcting inaccurate negative information is one of the fastest ways to improve your score.
How to Check Your Credit Score for Free
Monitoring your credit score has never been easier or cheaper:
Credit card issuers. Most major issuers now provide free FICO score access through your online account or mobile app.
Credit Karma. Provides free VantageScore access along with credit report monitoring and alerts. It’s one of the most popular free tools available.
AnnualCreditReport.com. The only federally authorized source for free credit reports from all three bureaus.
Checking your own credit score is a “soft inquiry” — it has zero impact on your score. Check as often as you want without worry.
How to Improve Your Credit Score
Improving your credit score comes down to optimizing the five factors above:
Pay every bill on time. This addresses the biggest factor (35%). Set up autopay and calendar reminders. Even one missed payment sets you back significantly.
Pay down credit card balances. Reducing your utilization is the fastest way to see score improvement since it’s recalculated each billing cycle.
Don’t close old accounts. Keep them open to preserve your account age, even if you rarely use them.
Limit new applications. Only apply for credit you actually need, and space applications several months apart.
Dispute errors on your credit report. Review your report annually and challenge any inaccurate information.
Be patient. Credit scores reward consistency over time. Most people can move from “fair” to “good” within 12 to 24 months of consistent good habits.
For a deeper understanding of how all these financial concepts connect, read my complete financial literacy for beginners guide.
Frequently Asked Questions
How often does my credit score change?
Your credit score can change every time new information is reported to the credit bureaus — which typically happens once per month for each of your accounts. In practice, most people see their score fluctuate slightly each month based on changes in balances, payments, and account activity.
Does checking my credit score hurt it?
No. Checking your own credit score is a soft inquiry and has no impact on your score whatsoever. Only hard inquiries — when a lender checks your credit because you’ve applied for new credit — can lower your score.
Why are my credit scores different at each bureau?
Not all lenders report to all three bureaus, and the bureaus may receive information at different times. This means each bureau may have a slightly different version of your credit history, which produces slightly different scores. Small differences are normal and not a cause for concern.
Can I have a credit score with no credit history?
No — you need at least one active credit account and at least six months of credit history to generate a FICO score. If you’re starting from zero, a secured credit card is the fastest way to begin building credit history.
How long does it take to build a good credit score from scratch?
With consistent on-time payments and low utilization, most people can build a score in the “good” range (670+) within 12 to 24 months of opening their first credit account. Building an “excellent” score (800+) typically takes several years of positive credit history.
The Bottom Line
Understanding how credit scores work gives you the power to control one of the most influential numbers in your financial life. Your score isn’t random — it’s a direct reflection of five specific behaviors that you can manage and improve over time.
The formula is straightforward: pay on time, keep balances low, maintain old accounts, limit new applications, and monitor your report for errors. Do these consistently, and your score will take care of itself.
Toyin Onagoruwa is the founding editor of BrokeMeNot. With over five years of experience in personal finance writing and a background in financial services, he helps everyday people navigate credit cards, budgeting, and smart money management. Connect with him on LinkedIn.