Credit scores explained

A credit score is a number designed to predict how likely you are to repay borrowed money. It is not a measure of your income, your intelligence or your worth. It is a risk estimate built from information in your credit reports.

In the US, most scores fall between 300 and 850. Higher is generally considered lower risk. Different lenders use different scoring models, and a score is only one part of an application.

Score, report, decision

These three things are related but not the same:

• Credit report: the underlying record of accounts, balances, payment history and inquiries.
• Credit score: a number calculated from that record by a scoring model.
• Lender decision: the lender's own approval, rate and terms, which may use a score plus income, debt, assets and its own rules.

You can have a good score and still be declined for a loan if the lender thinks the payment is unaffordable. You can also have a thin file — little borrowing history — and no score at all.

The usual score ranges

FICO and VantageScore use similar general bands, though lenders set their own cut-offs:

These labels are rough. A 740 may get a better rate than a 720 at one lender and the same rate at another.

What tends to matter most

Scoring models are proprietary, but the broad factors are well known:

1. Payment history. Late payments, defaults and collections hurt. On-time payments help.
2. Amounts owed. High credit card balances relative to limits can signal risk. This is often called utilization.
3. Length of credit history. Older accounts can help, especially when they are in good standing.
4. New credit. Several recent applications can look risky.
5. Credit mix. A mix of cards, installment loans and a mortgage can help, but it is usually a minor factor.

Missing a payment by 30 days is different from missing one by 90 days. Recency and severity matter.

Utilization in plain English

If you have a $2,000 limit and a $400 balance, your utilization is 20%. Many people aim to keep reported balances below roughly 30% of limits, and lower can be better. This is a guideline, not a rule that guarantees a score.

Utilization is calculated from the balance the issuer reports, which may be the statement balance rather than the amount you pay later. Paying before the statement closes can lower the reported balance.

Hard inquiries and soft inquiries

• A hard inquiry usually happens when you apply for credit. It can have a small, temporary effect on a score.
• A soft inquiry happens when you check your own score, a lender pre-screens you, or an employer checks your record. Soft inquiries do not affect your score.

Rate shopping for a mortgage or auto loan within a short window is often treated as a single inquiry by scoring models, but the details vary. Check the model's documentation if the timing matters.

Things that do not directly affect your score

• Your income.
• Your bank balance.
• Your employment status.
• Whether you pay interest, in and of itself.
• Your race, religion, national origin, sex or marital status.

Lenders may ask about income and assets, but those are underwriting factors, not score inputs. Carrying a balance can still affect your score, because the reported balance influences your utilization ratio.

Common myths

“Closing a card always raises my score.” Not necessarily. Closing an old card can shorten your history and reduce available credit, which can raise utilization.

“I need to carry a balance to build credit.” No. Paying the statement balance in full still builds a payment history and avoids interest.

“Checking my own score hurts it.” Checking your own score is normally a soft inquiry. The score you see may also differ from the one a lender uses.

“A score is permanent.” Scores change as reports change. Negative items usually age off over time, and positive history can offset them.

How to check and improve

Get your reports from AnnualCreditReport.com, the official site created by the three nationwide credit bureaus. You can review them for errors, unfamiliar accounts and incorrect balances.

To build or repair credit:

• Pay every bill on time, at least the minimum.
• Pay down revolving balances before the statement closes if possible.
• Avoid unnecessary new applications.
• Keep old accounts open if they are useful and have no fee.
• Dispute clear errors with the bureau and the furnisher.
• Use automatic payments so a forgotten due date does not become a late mark.

Be cautious with credit-repair companies that promise to remove accurate negative information. Accurate history generally stays until it ages off.

The bottom line

A credit score is a shorthand for risk, not a verdict. It can affect the cost of borrowing, insurance in some states and even rental applications, but it is not the whole picture. Focus on the behaviours that feed the report: on-time payments, manageable balances and a stable record over time.

For the borrowing side of the equation, see how much house you can afford or run a credit card payoff estimate.