A credit score is a three-digit number, usually on a scale of 300-850, that lenders and credit card issuers use to help them decide whether to approve your credit application. The higher your score, the better your chances.
Borrowers with scores above 750 have a better chance at qualifying for credit cards and loans and getting the best interest rates. Good credit also can save you money. You may qualify for better cell phone deals, pay smaller (or no) utility deposits and pay less for insurance, for example. And some employers and landlords consider credit as well.
When you or a lender "check your credit," a scoring model from either FICO® or VantageScore® is applied to the current data in one of your credit reports. Your score will vary, depending on which scoring model was used and whether it looked at your credit report from Experian®, Equifax® or TransUnion®. In fact, you really have many credit scores, because of the variety of scoring models and number of credit bureaus. And those scores can vary month to month or day to day as new data gets sent to your credit reports.
Your credit reports are a record of how you’ve used credit in the past. Credit scores, in turn, interpret the information in your credit reports to estimate the likelihood that you will repay borrowed money. Information about your credit is collected by the three major credit bureaus, Equifax®, Experian® and TransUnion®, as well as some smaller companies. It’s important to check your reports for accuracy so errors aren’t hurting your credit scores.
The most commonly used credit scoring models range from 300 to 850. Each lender sets its own standards for what constitutes a good credit score. But, in general, scores fall along the following lines:
Excellent credit: 720 and higher
Good credit: 690-719
Fair credit: 630-689
Bad credit: 629 or lower
Your credit score is determined by several factors, listed in the order of importance:
Payment history: your record of on-time payments and any negative marks, such as missed payments, accounts sent to collections or bankruptcies.
Credit utilization: balances you owe and how much of your available credit you're using.
Age of credit history: how long you've been using credit.
Applications: how frequently you've applied for credit recently.
Type of credit: how many and what kinds of credit accounts you have, such as credit cards, installment debt (such as mortgage and car loans) or a mix.
A credit score does not consider your income, savings or job security. That’s why, in addition to your credit score, lenders also may check what you owe, how much you earn and assets you have.
To build your credit score, follow these tips:
- Pay all your bills, not just credit cards, on time. Late payments and accounts charged off or sent to collections will hurt your score.
- Use no more than 30% of your credit limit on any card — less, if possible. The best scores go to people using 10% or less of their credit limits.
- Keep accounts open and active when possible — that gives you a longer payment history and can help your "credit utilization," or how much of your limits you're using.
- Avoid opening too many new accounts at once. New accounts lower your average account age and each application causes a small ding to your score. We recommend spacing credit applications about 6 months apart. Make sure you conduct thorough research on the best credit card for your needs before applying.
- Check your credit reports and dispute errors.
If you're just starting out or haven't used credit in at least six months, you might not have a score. Don't worry, NerdWallet has a guide to help you get started with building credit.
It'll take a few months to generate a score, and then you can follow the tips above and watch your progress on your NerdWallet dashboard.
Paying late can hurt your credit score, as can having a credit card balance that’s 30% or more of the credit limit. It takes longer to recover from a late payment, which can stay on your credit reports for up to seven years. But the damage from a high balance disappears after you’ve brought the balance down.
Other negative marks on your credit reports can come from defaulting on an account (not paying as agreed), being sent to collections, having a repossession or foreclosure, or filing for bankruptcy.
