How Credit Works

What Is a Credit Score?

By Lauren Bringle, AFC®

A credit score is a three-digit number that is calculated by weighing the information on your credit report. The credit score range runs from 300-850.

Your credit report is made up of several factors including payment history, amount of debt, length of history, types of credit, and new credit inquiries. These items are factored together to create your credit score.

Having a good credit score is one key to receiving many necessary funds and services in the U.S. Your credit score is used by creditors and lenders to determine the amount of financial risk involved if they give you credit. The higher your credit score, the more creditworthy you may seem and the more likely you are to receive credit or a loan.

The lower your credit score, the more likely a lender is to view you as a high financial risk. Having bad credit or no credit may result in having your credit applications denied, getting charged higher interest rates, having to pay larger deposits for services, or other negative consequences.

Read on to learn:

Credit scores 101

There are some common credit score myths out there, so let’s clear a few things up right off the bat. Here are a few credit score basics:

You don’t just have one credit score

If you have one credit score, chances are you have several credit scores. There are different credit scoring models out there, which each have different versions, and may be pulled from a different credit reporting agency. Some lenders even use their own scoring models.

So if you see one score on your CreditWise and a different score through Self, for example, that’s why. While both of these sites use a VantageScore model, CreditWise pulls from TransUnion[1], while Self pulls credit score data from Experian.

Learn more about the different types of credit scores.

Not everyone has a credit score

According to FICO[2], to have a FICO credit score, you need:

  • At least one credit account opened for six months or more
  • At least one account that has been reported to the credit bureau within the past six months
VantageScore is a little more flexible in who they score. You may only need a few months or less of credit history to obtain a VantageScore. However, lenders often rely on the FICO score when underwriting credit applications.

So even if you have a VantageScore, lenders who only use FICO won’t see a score for you until you’ve reached at least the six-month mark in your credit history.

Learn more about how long it takes to build credit.

Your credit report doesn’t show your credit score

Your credit report shows the primary information that is factored into your credit score, but it doesn’t show the score itself.

However, if you need to build or rebuild your credit, reviewing your credit report is a good idea, since it provides clues into any issues on your credit history. For example, you can review your payment history for any late or missed payments, which often hurt your credit score.

The credit score you see on free sites may not be the same one lenders use

If you use a free, third-party credit monitoring site (like Credit Sesame, CreditKarma, etc.) you are likely seeing some version of your VantageScore. While VantageScores can be a great tool to keep a pulse on your credit score health, keep in mind your FICO score might look different.

Checking your credit report and/or credit score does not impact your credit

If you check your own credit score, or pull a copy of your own credit report for informational purposes, your credit score will not be impacted.

The same usually holds true for when an employer, landlord or pre-screened credit offer pulls your credit. In general, your credit score is only impacted when a lender pulls your credit report to make an official lending decision.

Now that we’ve covered some of the basics, let’s dive into what goes into your credit scores.

What makes up my credit score?

Your credit score is made up of five factors: payment history, amount of debt, length of history, types of credit, and new credit inquiries. While both FICO and VantageScore use the same factors, for the purpose of this article, the information below is based on the FICO scoring model.

Here's how each factor breaks down:

Payment History - 35%

At 35% of your credit score, payment history accounts for the highest percentage of any single factor on your credit report. Lenders want to make sure they will be paid back on time and your previous payment history is a good indicator of your future behavior.

The ability to pay loans, credit cards, or other bills on time sends a message that you are responsible with your money and can possibly manage a little bit more.

Each month, creditors report your payments to the credit bureaus. Consistent on-time payments won't necessarily lift your credit score, but they will maintain your credit score (and may improve it eventually as your payment history lengthens).

Late payments tend to have the biggest impact on your credit score when they first show up on your report, though they remain on your credit report for up to seven years[9].

Late or delinquent accounts, on the other hand, can seriously damage your score – and quickly. Typically, after a bill is 30 days late, it is reported to the three credit bureaus. It will be reported again if it is 60 days late, and again at 90 days if it is still not paid.

Eventually, the creditor can report the outstanding balance to collections, foreclose or repossess property, or take it to court for judgement. With each late payment or delinquency reported, your credit score is negatively affected.

Typically, it is simpler to maintain your credit health than to fix your credit after it breaks. If you have a bad credit score, check your payment history on your free credit report first for clues.

Amount of Debt - 30%

Also referred to as your credit utilization ratio, the amount of debt you currently owe makes up 30% of your credit score. To calculate this:

  1. Add your outstanding revolving account balances such as credit cards or retail cards (see "Types of Credit" below). This is your debt.
  2. Now, add the credit limits on your open revolving accounts. This is your total credit.
  3. Divide your debt by your credit and you have your debt-to-credit ratio, or percentage.
Creditors dislike high utilization rates as it tends to indicate the borrower may already be in over their head and have a more difficult time paying back the debt. It is widely recommended to aim for a credit utilization ratio under 30%.

For instance:

Let's say you have two credit cards, Card A and Card B.

  • Card A has a credit limit of $2,000
  • Card B has a credit limit of $1,000
  • This makes your total credit limit $3,000
If Card A has a balance of $100 and Card B has a balance of $800, your amount of debt is $900. Your debt to credit ratio would be: $900 ÷ $3,000 = .3 = 30%

But there is another factor here to consider. You also do not want to carry high ratios on each card.

In the example above, the overall debt to credit ratio is at 30%, but Card B is nearing its credit limit of $1,000. Carrying high balances and "maxing out" credit cards could also be a negative factor on your credit score.

However, not using your cards at all will not help your credit either. While paying off your balance each month helps you avoid interest charges, creditors want to see that you responsibly use and manage these credit cards on a regular basis, rather than avoiding them completely.

Each month as you make your credit card payments on time, you also build positive payment history.

Length of History - 15%

Generally speaking, the longer you've had a line of credit open, the better. Creditors want to know that you're trustworthy, and the longer you've proven responsible financial management skills, the less likely you are to default on a loan.

According to FICO[3], a credit score takes a few items into consideration when calculating the length of your credit history, including:

  • The average age of the accounts on your credit report
  • When you opened your newest credit account
  • The age of the oldest account on your credit report
  • How long ago you opened individual accounts
  • The length of time since you last used the accounts on your credit report
This past history is an important factor in a lender's decision, and a longer history gives the lender a clearer picture of your ability to repay. If you do not have a credit history, it's a good idea to start building your history as soon as possible.

Think of it like this:

If a friends asks to borrow money, the history of your friendship will likely affect your decision. If he or she has always seemed responsible and never borrowed money from you or anyone else you know before, you may be more willing to say yes. Though, it may be a small loan because you are unsure when and if he can pay you back.

If he's borrowed before and quickly pays back, or you know he's paid all his bills on time for the past five years, you're more likely to loan him more money because he's proven he is responsible when it comes to financial obligations.

On the other hand, if you've heard stories from various people that say your friend has not paid them back in years, or you know he has trouble paying his bills on time each month, you probably will not loan him any money because of a long track record of late payments and the debt he already has with other people.

Creditors work in a similar way. Only instead of knowing you through their own relationship and that of your friends, the only reputation they know of is the one on your credit report.

Types of Credit - 10%

Types of credit makes up 10% of your credit score. There are two basic types of credit, revolving and installment accounts. The credit bureaus like to see a mix of revolving and installment accounts, but they also want to see that you manage them all responsibly.

How many credit accounts is too many?

There's no one answer to this question, but creditors like to see that you have accounts that are being used regularly and responsibly, so you should not open accounts you don't plan to use.

Likewise, closing an account does not make it disappear from your credit report. Learn how closing accounts impacts your credit.

Let’s take a closer look at each of these credit types:

Revolving Credit

Revolving credit refers to credit that can be spent flexibly and does not have a fixed number of payments. Credit cards are the most popular type of revolving credit, but retail accounts and home equity lines of credit are other examples of revolving credit.

Having revolving credit, paying on time, and keeping balances low demonstrate an ability to manage funds without overspending. Carrying a high balance from month to month sends a message of overextending your finances and could have a negative effect on your credit score.

Installment Credit

Installment credit is a specific amount of money loaned over a set amount of time. Examples of installment credit would be car loans, students loans, or home mortgages. These loans give you money one time and designate the time frame and frequency (usually monthly) to pay off the loan.

For instance, a car loan may be for $10,000 over five years. This number cannot be changed after the loan has been given, and you would be expected to make payments each month for 60 months (five years). Similar to revolving credit, your on-time payments may reflect well on your credit score and show responsible borrowing on your part.

New Credit Inquiries - 10%

New credit inquiries refer to any time a lender does a "hard pull" on your credit report, meaning they request an official credit report. This occurs each time you apply for a credit card or loan, and this will show on your credit report whether or not you are approved for a loan.

Generally speaking, this will not affect your score much. But if you apply for multiple lines of credit within a short period of time, this can negatively affect your credit score. If you apply for multiple credit cards in a short amount of time, this may show a high credit risk. But multiple inquiries for car loans or mortgages generally do not affect your score much, since you are encourage to rate shop, as long as they are done within a short timeframe.

Finally, checking your own credit score from an authorized provider will not have an impact.

Why do I have different credit scores?

When it comes to your credit score, one of the most important things to understand is that there are multiple credit scoring models – each as unique as your fingerprint. Each of these credit scoring models have different versions, and may be pulled from a different credit bureau. Some lenders even use their own scoring models.

That’s one reason your credit score on one site may look very different than on another.

Sound confusing?

While these credit scores look different on the outside, there are common traits they all share, which we’ll get to in a minute. If you’re trying to build your credit, focus on these 5 major components of a credit score first.

While there are a variety of credit scoring models, the credit score used by 90% of institutions is the FICO® score, which runs on a scale from 300–850. The other major credit scoring model is the VantageScore.

Let’s take a closer look at each...

FICO vs. VantageScore

Until 2006, the FICO Score had relatively little competition. It wasn't until the VantageScore – created jointly by Equifax, Experian and TransUnion – that the FICO Score was truly challenged.

The FICO score uses credit bureau data, but was invented and is still controlled by Fair Isaac Corporation, a separate third-party company. While both FICO Scores and VantageScores take the same overall factors into account, there are key differences between the two scoring models, such as:

  • Minimum credit scoring requirements. While FICO requires at least six months of history and at least one account reported in the past six months, VantageScore takes less time to get, meaning more consumers can be scored.
  • Late payments. FICO treats all late payments the same, while VantageScore weights late mortgage payments more heavily[4].
  • Multiple inquiries. For FICO, student loan, mortgage and auto loan inquiries within a 45-day window are treated as one[5]. For VantageScore, there’s a shorter window of 14 days[6].
  • Collections. While VantageScore removes all paid collections from their model[7], with a FICO score, the impact of paying collections can vary widely[8].
In addition, the FICO score model applies differently to the different credit bureaus. While VantageScore applies the same model across the three major credit bureaus, the score at each bureau could still look different depending on how much of your information is housed at each bureau.

For example, one of your lenders may report to all three credit bureaus, while another only reports to Experian. In that case, your scores could look different at different bureaus.

No matter the scoring model, one thing is constant – good credit history means a higher credit score. And the higher your credit score, the higher the likelihood you will receive credit, loans, or services at the most competitive rates.

Learn more about the differences between FICO and VantageScores.

Why do I need a credit score?

As the “Broke Millennial,” Erin Lowry, says: your credit score is like an insurance policy for your finances. The best time to build it is before you need it. That way, if you need to borrow money, you’ll be prepared.

If you want to buy something big, like a house or car, or even just finance an engagement ring or cell phone plan for example, your credit matters.

If you need a line of credit or a loan, your credit score will be a factor in determining whether a lender will take the risk to approve you and what interest rate you’ll be charged.

A higher credit score generally means you get charged lower interest rates, while a lower credit score often leads to higher interest rates or other barriers like larger down payments, deposits, or other charges.

If you have no credit or bad credit you may qualify for some credit products, but they often come with high interest rates, if you can qualify at all.

How do I check my credit score?

There are several ways you can check your credit score. For example, you can use a free credit monitoring site, find it online through some banks, credit unions, and credit card providers. Or you can get access to your FICO scores, for a fee, from MyFICO.

Self customers who have a credit score can also check their VantageScore by logging into their account online or through the mobile app, at no extra cost.

To download copies of your credit report, visit

How do I build a credit score?

Do you have a low credit score? No credit score? Self provides a step-by-step credit building process that could help you overcome that obstacle. Learn more or get started at

Not ready to take the plunge towards building your credit just yet? Here are some other resources that may help you get your credit back on track.


  1. CapitalOne
  2. MyFICO: FICO score requirements
  3. MyFICO: Length of credit history
  4. USA Today
  5. FICO: inquiries
  6. VantageScore: inquiries
  7. VantageScore: collections
  8. MyFICO: paying collections
  9. MyFICO: late payments

About the author

Lauren Bringle is an Accredited Financial Counselor® and Content Marketing Manager with Self Financial – a financial technology company with a mission to help people build credit and savings. See more about Lauren Bringle on Linkedin or Twitter.