Key takeaways:
- A credit score is a three-digit number that helps lenders determine your creditworthiness.
- Good credit scores can help you qualify for loans, credit, and favorable terms like low interest rates.
- There are five credit levels, which range from 300 to 850. Where does your credit score fall within these ranges?
A credit score is a three-digit number the financial world uses to understand a person’s creditworthiness. In other words, a person’s credit score shows how likely they are to pay back the money they borrow.
Credit scores are very important because they affect each person’s ability to borrow money as well as the cost of doing so. Additionally, a low credit score can even make it hard for a person to get a job or a place to live.
If you’re not sure what a credit score is, how it works or why you need one, explore our guide and discover everything you need to know about credit scores. It’s the first step toward living your best financial life.
What is a credit score?
A credit score is a number that ranges between 300 and 850. This number signals to a lender how reliable you are at paying back the money you’ve borrowed. Credit scores play a key role in a lender’s decision to offer a person credit.
Credit scores are based on the contents of a person’s credit report. It reflects how well a person has managed personal loans, lines of credit, and other financial payments in the past. The more responsible a person is with their finances, the higher their score will be.
A higher credit score will help a borrower qualify for better terms and interest rates. Lower scores can negatively affect the interest rates a person qualifies for. It also may prevent a person from qualifying for a financial product altogether.
Why are credit scores important?
Most people need to take out loans to make big purchases, like buying a home, a car, or paying to go to school. When you apply for a loan, lenders will check your credit report and score to determine if they can trust you to pay back what you borrow.
A good credit score and positive credit history will signal that you’re reliable. Once your creditworthiness is confirmed, lenders will be more likely to approve you for credit or grant you favorable terms.
If your score is low, lenders may not approve your requests and if they do, you may see higher interest rates.
How are credit scores calculated?
Each financial action you make with your credit accounts is recorded and reported by your creditors to one of the three big credit reporting agencies, also called credit bureaus. The three biggest credit agencies are Equifax®, Experian™, and TransUnion®.
Once the financial data is collected, they use a fairly complex algorithm called a scoring model to analyze your data. The information gathered by these credit bureaus varies, but each one typically evaluates:
- If you currently have debt in collections or you have experienced a foreclosure or a bankruptcy
- Length of credit history
- New credit
- Payment history
- Total amount owed
- Types of credit (your credit mix)
The bureaus use these components to determine your credit score and credit report. You can think of your credit score like a grade you get on the final exam of a class, and a credit report as a financial report card.
Credit reports include information about your past credit activity and the present state of your finances. Lenders and lending platforms will use your score and report to determine if they’ll lend you money and, at how low or high of an interest rate.
What are the 5 credit score ranges?
Each credit bureau uses a different scoring model to determine credit scores. Two of the most popular models are FICO® (Fair Isaac Corporation) and VantageScore®. That’s why each person has more than one credit score.
Here are their credit score ranges to show you what’s considered a good vs. bad credit score. The credit score levels include:
- Excellent: 800–850
- Very good: 740–799
- Good: 670–739
- Fair: 580–669
- Bad: 300–579
How do I check my credit score?
You are entitled to a free copy of your full credit report every 12 months from each credit reporting company. There are a few companies that make it free and simple to check your credit score:
- TransUnion FICO score: Credit Karma
- Experian FICO score: Credit Sesame
- Equifax FICO score: Equifax
Do credit checks lower my credit score?
It depends. There are two types of credit checks: hard inquiries, known as a “hard pull,” and soft inquiries, known as a “soft pull.”
- Hard inquiries are typically initiated by loan providers before they make a decision about your application. When you apply for a credit card, a car loan, or a mortgage, your loan provider will probably run a hard inquiry into your credit. This type of credit check will knock a few points off your score for up to 6 months.
- Soft inquiries have no impact on your credit score. When you check your score, it’s categorized as a soft inquiry. These pulls are made by potential employers and landlords, as well as banks, credit card companies, and mortgage lenders. They use the information to confirm your identity and decide whether you qualify for pre-approval.
We do a hard inquiry after you make a profile and loan application to verify that you meet our credit minimum.
How to improve a credit score
If your score is low, there are steps you can take to improve your credit score. Here are some ways you can start improving your credit score:
- Avoid opening too many accounts: Applying for new credit accounts may lead to a hard credit check, which can temporarily lower your credit score. Trying to apply for several types of credit within a short period of time can cause a credit score to significantly drop.
- Address credit report errors: Everyone makes mistakes, including people who work at credit bureaus. Check your credit report to see if there are any errors. If you notice a mistake, call your creditor to get it addressed.
- Keep your balances low: An important part of your credit score is your credit utilization rate. This rate is the total amount of all your balances, divided by the sum of your cards’ credit limits. By keeping low balances, you can keep your credit utilization rate low, which can help your credit scores.
- Pay your bills on time: Another way to increase your credit score is by making your monthly payments on time. However, it will take about six months of on-time payments to see a difference in your score.
Discover more ways to improve your credit score here.
You are more than your credit score™
Even though credit scores are an important factor to consider when it comes to your financial health, it is not a full representation of your creditworthiness. However, it is up to you, the borrower, to take steps toward financial wellbeing and your financial goals.
If you’re not sure where to start, focus on paying your bills on time, resolving debt, and addressing mistakes on your credit report. And if you are in need of a loan, Upstart looks beyond your credit score, using non-traditional variables such as employment and education¹, when it comes to personal loans, credit card debt consolidations, and more.
¹Neither Upstart nor its bank partners have a minimum educational attainment requirement in order to be eligible for a loan.
Won't affect your credit score¹