What Is a Credit Score and Why Is It Important?
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Credit scores have become an integral part of our financial lives. It pays to keep track of yours and understand how your actions affect the numbers. You can build, defend and take advantage of great credit regardless of your age or income.
Credit score definition
Credit scores are calculated based on information from your credit reports. Your score — something between 300 and 850 — signals to lenders if you’re “creditworthy” and determines the financial products you can qualify for.
People with higher scores tend to have better access to financial products and services, while people with lower credit scores might not qualify for some things, such as loans and credit cards, and may be charged more in interest.
Your credit scores determine a lot more, too. For example, insurers use credit scores to set premiums for auto and homeowners coverage. Landlords use credit scores to decide who gets to rent their apartments. Credit scores determine who gets the best cell phone plans and who has to make bigger deposits to get utilities.
It’s free — and harmless — to check your credit scores.
» Get your free credit score with NerdWallet today.
How are credit scores calculated?
Credit scores are calculated based on the information in your credit reports. Most people don’t have one score; they have many, and the scores change all the time.
Your scores are then categorized within ranges, outlined by prominent credit scoring companies FICO and VantageScore. The credit score ranges generally determine whether your score is seen as excellent, good, fair or poor by lenders. FICO and VantageScore have their own distinct ranges, which means a “good” credit score at VantageScore might not quite make the cut at FICO.
Score calculations consider a variety of credit scoring factors — such as payment history, how much of your available credit you’re using, how long you’ve had credit and your credit mix — and then weight them to generate a score.
Your scores differ based on the scoring formula used, and on which of the three credit bureaus supplied the information used to create the score. Not all lenders report to all three bureaus, so there might be some information on one credit report that’s not on the others.
» NEXT: Which factors affect your credit score?
How to build your score
Credit scores might feel mysterious, but there are some ways to elevate them. If you’re looking to build credit, try these:
Pay your bills on time. This is the most influential credit scoring factor.
Know your credit limits and stay well beneath them. Using your credit cards is important because it helps build your payment history, but it’s a good rule of thumb to try to spend no more than 30% of your available credit limit to keep your utilization low.
Pay balances in full if you can. There’s no need to carry debt when your goal is growing your credit scores. If you do carry balances, try to pay them down as quickly as possible.
Avoid closing your oldest accounts, even if you don’t use them much. Your “credit age” is a piece of the credit scoring puzzle. Consider keeping older cards active by putting a small, recurring charge on it each month and setting up autopay.
» Want a “good” credit score? Here are tips for how to get there
Why your credit score matters
You can leverage great scores into great deals — on loans, credit cards, insurance premiums, apartments and cell phone plans. Bad scores can hammer you into missing out or paying more.
Having good or excellent credit can provide significant savings over your lifetime by paying less in interest on a home or car loan, for example.
Consistently monitoring your score can also help you spot identity theft or other mistakes on your credit report. Major drops in your score could signal a problem and being on top of things means you can take steps to dispute credit report errors and get your score back on track faster.
