Why Your Credit Score Matters

When used responsibly, access to credit can be important for building wealth and managing day-to-day personal finances. And whether you want to get a mortgage to buy a home or use a credit card to rent a car, a good credit score can make accessing credit easier and less expensive.

A credit score is an easy-to-read number that creditors can use to help understand the likelihood that someone will miss a bill payment in the future.

Computer programs—called scoring models—analyze your credit report to determine your scores, which generally range from 300 to 850. A higher credit score indicates that a person is less risky, which is why a higher number can help you qualify for loans and credit cards with low interest rates and higher credit limits.

Although you might think about your credit score in the singular, there are actually many different types of credit scores available. Similar to other types of computer programs, new versions of the scoring models are developed and released. And competing companies create and sell credit scores; the main two are FICO and VantageScore.

FICO and VantageScore credit scoring models use the same underlying credit report information to predict the likelihood that a person will be at least 90 days past due on a bill during the next 24 months. But the companies' credit scores use slightly different weighting and rules to determine your score. There are even differences in the various scoring models from the same company.

Creditors can choose which credit scores to use when analyzing your credit applications and managing your existing accounts. For instance, Synchrony Bank uses the VantageScore 4.0 scoring model when evaluating credit card applications. But a different credit card issuer might use a FICO score to determine whether you qualify for their cards.

Establishing and building a good credit score can take time and effort. But you could be well rewarded: Having a good credit score can help you save money and give you more financing options. Specifically, a good credit score can help you:

• Qualify for more financial products, such as loans and rewards credit cards.
• Receive lower interest rates, lower fees and higher limit loans and credit cards.
• Rent an apartment or home.
• Open a new phone or utility account without a security deposit.

Your credit history, but not your credit score, can also sometimes be important when you apply for a job or promotion. And some insurance companies use credit-based insurance scores to help set your premiums.

Most consumer credit scores depend entirely on the information in one of your credit reports from either Equifax, Experian or TransUnion—the three major consumer credit bureaus.

The exact impact of specific actions depends on your overall credit profile, but the scoring factors are often put into different categories based on their relative importance. In order from most to least important, these are:

• Payment history: Whether you've paid your bills on time, missed payments, had accounts sent to collections or filed for bankruptcy. On-time payments can help your credit scores, while late or missed payments can hurt them.
• Current credit usage: The number of loans and credit cards you have with balances and how much you still have to pay off. The amount of credit you're using on revolving accounts—credit cards and lines of credit—is also called your credit utilization ratio, and it can be an especially important part of this category.
• How long you've used credit: The age of the accounts in your credit reports can also affect your scores. Having old accounts, even if they're closed, and a high average age of accounts could help your score.
• Experience with different types of accounts: Having experience managing loans and revolving credit accounts can also help your credit scores.
• Recent activity: Applying for and opening new accounts can sometimes hurt your scores. However, scoring models don't penalize you if you're shopping for certain types of loans, such as a mortgage.

Your credit scores might differ depending on where you check them because the scoring models use different rules or criteria. Additionally, your credit reports are often slightly different, which can result in different scores. However, your credit scores tend to move up or down in unison over time.

Base FICO credit scores and the latest VantageScore models, VantageScore 3.0 and VantageScore 4.0, have a 300 to 850 range. Your credit score might be described as poor to excellent/exceptional, depending on where it falls. Here's how scoring ranges are commonly broken down:

Source: Experian

The scoring ranges show that a good credit score could be a FICO score above 669 or a VantageScore over 660. However, creditors can choose the specific ranges and descriptions they want to use when making decisions. Having an even higher credit score might help ensure you're in a creditor's good range, which could increase the chances of getting approved and receiving favorable terms.

To build your credit score, you'll need to have and use accounts that are reported to the credit bureaus. Responsibly using credit cards to build credit can be a good strategy. However, although most major credit card issuers and lenders report accounts to all three bureaus, it can be difficult to get started because you may need good credit to qualify for a loan or credit card.

Fortunately, there are a few options for people who are starting out:

• Open a secured credit card: Secured cards don't require a good (or sometimes any) credit score. However, you'll need to send the card issuer a refundable security deposit. The deposit will determine your card's credit limit, and the card issuer can keep the deposit if you stop paying your credit card bill.
• Get a credit-builder loan: A credit-builder loan is another credit-building tool. The loan you receive is set aside in a locked savings account, your monthly payments help you build credit and you receive the funds once you pay off the loan. This can be a helpful way to build your savings and credit at the same time.
• Join a lending circle: Some nonprofits help organize credit-building lending circles. Each month, a group of people contribute the same amount of money to a shared pot—and the organization reports these payments to the credit bureaus. One person in the group receives the money, and it rotates until everyone has had a turn. Unlike credit-builder loans, lending circles often don't have any fees or interest.
• Become an authorized user: If you have a family member or close friend who responsibly manages their credit card, you could ask them to add you as an authorized user on their account. Some card issuers report the card account to the credit bureaus under the authorized user's name as well, which can help you build credit.

There are also many organizations creating products to help people build credit. For example, some companies now offer debit-like cards for building credit (debit cards generally don't affect your credit) or help you add noncredit payments to your credit reports, such as rent or utility payments.

Once you've established your credit, you can generally improve your credit score if you:

• Pay your bills on time: Your on-time credit payments can help your credit scores, while late and missed payments can hurt them. Even missing payments on accounts that aren't reported to the credit bureaus can hurt your credit if the accounts are sent to collections.
• Only use a small portion of your revolving credit: If you have credit cards or lines of credit, be mindful of your credit utilization ratio. As a general rule of thumb, try not to use more than 30% of your credit limit—although using less than 10% can be better for your credit scores.
• Use different types of credit: Having a mix of open installment accounts—loans with a fixed repayment schedule—and revolving accounts, such as credit cards and lines of credit, can be good for your credit.
• Keep your credit cards open: Although it can be tempting to close a credit card you don't use, keeping the card open can give you more available credit (lowering your utilization rate) and help your credit mix. Closed accounts can affect the age-related scoring factors until they fall off your credit report, seven to ten years later.

Getting an excellent credit score can take time, and you might slip up along the way. Most negative marks, such as late payments, can affect your credit scores for up to seven years. However, the impact diminishes over time, and getting back on track as quickly as possible can help you recover.

There's no specific timeline for improving your credit scores, but patience is important. When you're brand new to credit, it can take time to increase the age of your accounts. And, if you have negative marks in your credit reports, such as late payments or collection accounts, their impact will decrease over time.

In general, using credit accounts and paying your bills on time can help you improve your credit scores over time. Maintaining a low utilization ratio can also be important. When a high utilization ratio is hurting your credit scores, paying down your credit card balances and decreasing your utilization might quickly increase your scores.

Whether you're just starting out or you've used credit for years, keeping an eye on your credit reports and scores can be important.

• You can get a free copy of each of your three credit reports on AnnualCreditReport.com.
• The three credit bureaus—Equifax, Experian and TransUnion—also offer free access to your credit reports on their websites.
• If you have a credit card from Synchrony Bank, you can get your free VantageScore credit score based on your TransUnion credit report with monthly updates.

Your credit reports don't necessarily come with a credit score. But as the basis for your credit scores and credit-related decisions, it's important to closely review each of your reports.

If you notice an error, you can file a dispute with the credit bureau, which will then investigate your claim and either verify, correct or delete the information.

Additionally, you might be able to get free access to one of your credit scores from the credit bureaus. Many lenders, credit card issuers, credit counseling agencies and personal finance platforms also offer free credit score monitoring to their customers.

Learning the basics about credit scores is a great start. The next step is to establish and build a good credit history. Keep focusing on paying bills on time, and you could work toward an excellent credit score that helps you qualify for the best offers and rates.

Louis DeNicola is a finance writer based in Oakland, California. He specializes in consumer credit, personal finance and small business finance, and loves helping people find ways to save money. He also writes for Experian, FICO, USA Today and various fintechs.