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Your credit score can affect whether you’ll qualify for things like credit cards, auto loans, and mortgages — and how much you’ll pay for them. Cellphone companies and companies selling auto and home insurance also use credit scores. The higher your score, the better. To improve your credit score, focus on things like paying your bills on time, paying your outstanding balances, and avoiding opening several new accounts at the same time.

What’s a credit score?

A credit score is a number — typically between 300-850 — that estimates how likely you are to repay a loan and make the payments on time. Credit scoring systems calculate your credit score in different ways, but the scoring system most lenders use is the FICO score.

Your credit score is based on information in your credit report. Businesses use your credit score to help decide whether to give you credit and what the terms will be — including what interest rate you’ll pay to borrow money.

A high score means you have “good” credit, which means businesses think you’re less of a financial risk. That means you’re more likely to get credit like a loan or credit card.

A low score means you have “bad” credit, which means it will be harder for you to get credit. You’re more likely to pay higher interest rates on credit that you do get.

Some insurance companies also use credit report information to help decide whether to give you insurance and what premium they’ll charge. The credit scores used by insurance companies are sometimes called “insurance scores” or “credit-based insurance scores.”

How does a credit scoring system work?

Credit scoring systems are complex and different. Some systems might include factors others don’t, or weigh factors differently. Here are common factors in your credit report used by credit scoring systems:

  • Have you paid your bills on time? If your credit report shows that you’ve paid bills late, had an account put in collections, or declared bankruptcy, that’s likely to negatively affect your score.
  • Are you maxed out? Many scoring systems look at the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, it will probably hurt your score.
  • How long have you had credit? A short credit history may hurt your score, but paying bills on time and having low balances can offset that.
  • Did you apply for new credit lately? Each time you apply for credit, it shows as an “inquiry” on your credit report. Many scoring systems look at inquiries. If you’ve applied for too many new accounts recently, it could hurt your score. Not every inquiry is counted: for example, inquiries by creditors who are monitoring your account or making “prescreened” credit offers aren’t counted against you, and inquiries from multiple mortgage lenders in a short amount of time often count as just one inquiry.
  • How many credit accounts do you have, and what kinds of accounts are they? Having existing credit accounts can be a plus, but too many credit card accounts may hurt your score. Also, many scoring systems consider the types of credit accounts you have. For example, under some scoring systems, loans to consolidate your debt — but not loans for buying a house or car — may hurt your credit score.

Credit scoring models compare this information to the credit behavior of people with similar profiles and assign you a score. Some scoring models may use information outside of your credit report. For example, scoring models used by mortgage lenders might also consider the amount of your down payment, your total debt, and your income, among other things.

How do I find out what my credit score is?

Unlike your free annual credit report, you often have to pay to get your credit score.

Some companies might give you a free credit score if you sign up for their paid credit monitoring service, where they check your credit report for you. If you get an offer for free credit scores, check closely to see if you’re being charged for credit monitoring.

Do I need to know my credit score?

It depends. Before you pay to get your credit score, think about whether you need it. Your credit score is based on what’s in your credit history: if you know your credit history is good, your credit score will be good. It might be interesting to know your score, but decide if you want to pay to get it. 

How are my credit report and credit score connected?

Your credit score is based on the credit history in your credit report, so it’s important to make sure your credit report is accurate. The three nationwide credit bureaus — Equifax, Experian, and TransUnion — let you get your report for free online once a week from each bureau at AnnualCreditReport.com.

You also have the legal right to get a free copy of your credit report every year from each bureau. There are three ways to get it:

Annual Credit Report Request Service

P. O. Box 105281

Atlanta, GA 30348-5281

AnnualCreditReport.com is the only website authorized by law to give you these free credit reports. In addition, everyone in the U.S. can get another six free credit reports from Equifax each year  at AnnualCreditReport.com.

What if I’m denied credit or insurance, or don’t get the terms I want?

Federal law gives you the right to know the reasons a creditor denied your application. In many instances, you also have the right to know why a creditor offered you less favorable terms than you applied for. Know that it’s illegal for creditors to consider certain factors like race, sex, marital status, national origin, or religion when making a credit determination. Read Credit Discrimination to learn more.

If a business denies your application for credit or insurance (or offers you less favorable terms) because of information in your credit report, federal law says the business has to

  • give you a notice that includes, among other things, the name, address, and phone number of the credit bureau that supplied the information.
  • include your credit score in the notice if your credit score was a factor in the decision to deny you credit or to offer you terms less favorable than most other customers get.

Read Did a Lender Offer Less Favorable Terms or Deny You Credit? to learn more.

How do I improve my credit score?

When you get your credit score, you might get information on how to improve it. Improving your score by a lot will probably take some time, but it can be done. Under most scoring systems, your score might improve if you focus on paying your bills on time, pay down any outstanding balances, and avoid opening several new accounts at the same time.

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Credit, Loans, and Debt
Credit and Debt
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