Understanding your credit score is one of the most important steps you can take toward financial confidence. Whether you’re planning to consolidate debt, apply for a loan, or simply want to make smarter money moves, your credit score plays a key role. In this article, you’ll learn to understand your credit score, how it’s calculated, why it matters, and what you can do if you’re hoping to improve it.
What is a credit score?
A credit score is a three-digit number, typically between 300 and 850, that helps lenders determine how likely you are to repay borrowed money. Your score is based on your credit report, which includes your financial history—such as loans, credit cards, payment behavior, and more. The score is calculated by models like FICO® and VantageScore®, using data from major credit bureaus like TransUnion, Experian, and Equifax.
If you’re not sure what your score is, tools like Best Egg Financial Health let you check it for free. They also help with understanding your credit score by showing what factors are impacting it and offering ways to improve it.
What do credit score ranges mean?
A credit score is often categorized as Poor (300-649), Fair (650-699), Good (700-749), or Excellent (750-850). The higher your credit score, the more confident lenders will be about working with you. Understanding your credit score can help you identify where you stand before searching for loans and credit cards, and what you can expect from any offers you receive from lenders.
How scoring models calculate your score
Two major scoring models are FICO® and VantageScore®. While they use similar factors to determine your score, each model weights them differently. Regardless of how the factors are weighted, both models look at how you’ve managed money over time, so understanding your credit score begins with knowing how your financial behavior is measured and the ways it could impact your overall score.
Why understanding your credit score matters
Understanding your credit score gives you a clearer view of your overall financial health. It impacts:
- Loan or credit card approvals
- Interest rates and terms
- Rental agreements, utilities, and even insurance premiums
- Long-term goals like homeownership
Your credit score is more than just a number—it’s a guide to your financial habits and trustworthiness to lenders. That’s why understanding your credit score is essential to building a stable financial future.
Five key factors that impact your credit score
Let’s take a closer look at the five biggest elements affecting your credit score and what they mean for your financial health.
1. Payment history
Payment history carries the most weight in understanding your credit score. Lenders want reassurance that you’ll pay them back on time, so they rely heavily on your past behavior to predict your future actions. In fact, just one missed or late payment can cause a noticeable drop in your score, and repeated issues may signal to lenders that you’re a high-risk borrower.
Factors that can negatively affect your payment history:
- Late or missed payments
- Accounts sent to collections
- Bankruptcies, foreclosures, or debt settlements
A good tip is to set up automatic payments or calendar reminders, so you avoid missed payments. Even if you can only make the minimum payment, paying on time is better than missing entirely. If you’ve had problems in the past, don’t lose hope. Over time, consistent on-time payments may help rebuild your reputation and your score.
2. Credit utilization, or “amounts owed”
To better understand your score, keep credit utilization top of mind. Your credit utilization ratio measures how much of your available credit you’re currently using. For example, if you have a $10,000 credit limit across all cards and carry $3,000 in balances, your utilization is 30%. Most experts recommend keeping this number below that 30% threshold, but generally the lower, the better. Lenders see low utilization as a sign that you’re not overextending yourself financially. High utilization, on the other hand, might suggest that you’re relying too heavily on credit and could struggle to manage more debt.
3. Length of credit history
Another key factor in understanding your score is the length of your credit history. The age of your accounts tells lenders how much experience you have managing credit. A longer credit history gives them more data points to evaluate and generally works in your favor. Someone who has managed credit responsibly for 10 years offers more reassurance to lenders than someone who just opened their first card last year. This factor includes both the age of your oldest account and the average age across all your accounts.
Keep older accounts open, even if you don’t use them often. Closing them shortens your average credit history and may also reduce your available credit—both of which could lower your score. If you’re just starting out, consider becoming an authorized user on a trusted family member’s long-standing account. This can help lengthen your credit history without taking on new debt yourself.
4. Credit mix
Part of understanding your credit score involves knowing how different types of credit impact it. Lenders like to see that you can handle different kinds of debt. Credit scoring models reward borrowers who maintain a healthy mix of revolving credit (like credit cards) and installment loans (like auto loans, student loans, or mortgages). A diverse credit profile shows you can manage varying repayment schedules—fixed monthly payments on loans versus flexible balances on cards. This diversity makes you appear more financially responsible.
Don’t rush to open new accounts just to diversify your mix. That strategy could backfire if it leads to hard inquiries or higher debt. Focus on borrowing when it aligns with your goals—like financing a car or consolidating debt with a personal loan. In time, those responsible choices will naturally add diversity to your credit profile.
5. New credit inquiries
If you’re trying to better understand your credit score, it’s important to remember that new credit inquiries may have affected your score. Whenever you apply for new credit, lenders perform what’s called a hard credit pull. These checks can temporarily lower your score by a few points. While a single inquiry isn’t usually a big deal, several within a short period can raise red flags, suggesting you might be taking on more debt than you can handle. Credit scoring models often treat multiple inquiries for the same type of loan (like auto or mortgage loans) within a short time frame as one inquiry. This allows you to shop for the best rate without severe consequences. Opening multiple credit cards or loans in quick succession can signal financial stress and lower your score.
Smart strategies for building credit
- Apply for new credit only when you need it
- Space out applications to minimize the effect of inquiries
- Don’t worry too much about hard inquiries. They’re part of building a credit history. Used responsibly, new credit may strengthen your profile
Final thoughts on understanding your credit score
Understanding your credit score gives you the knowledge to build smart financial habits. Your score is more than just a number—it’s a reflection of how you use credit, your goals, and your potential. Whether you’re rebuilding your credit or simply want a clearer picture of how it works, knowing which factors are influencing your credit score gives you valuable insight into your financial health and helps you make money confident decisions.
This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.
