Credit scores may not be something they teach in school, but we're here for you! If you're curious about what they are, you're in the right place. Understanding how credit scores work doesn't have to be complicated!


We'll walk you through the various components that make up a credit score, so you can use that information to help boost your numbers, strengthen your purchasing power and improve your chances of borrowing money, getting a job, renting or buying a home, and purchasing insurance or utilities. Credit scores impact many things, so it's essential to understand them!


So what IS a credit score, anyway?


A credit score is a numerical representation of a borrower's creditworthiness. Lenders use credit scores to estimate lending risk. While the exact calculation models vary among credit bureaus and scoring systems, the following components are generally considered when calculating a credit score. Scores can range from 300-850.


Directly from the Equifax website, the scoring breakdowns are as follows:


  • 800 to 850: Excellent - Individuals in this range are considered low-risk borrowers. They may have an easier time securing a loan than borrowers with lower scores.
  • 740 to 799: Very Good - Individuals in this range have demonstrated a history of positive credit behavior and may have an easier time being approved for additional credit.
  • 670 to 739: Good - Lenders generally view those with credit scores of 670 and up as acceptable or lower-risk borrowers.
  • 580 to 669: Fair - Individuals in this category are often considered "subprime" borrowers. Lenders may consider them higher risk, and they may have trouble qualifying for new credit.
  • 300 to 579: Poor - Individuals in this range often have difficulty being approved for new credit. If you find yourself in the poor category, you'll need to take steps to improve your credit scores before you can secure any new credit.

There are three credit bureaus: TransUnion, Experian, and Equifax. As mentioned before, each bureau uses slightly different models for calculating your score, so there will be differences between the three. Lenders look at all three but often take the middle score when determining creditworthiness.


Payment History


Your payment history is the most significant factor in determining a credit score. It shows whether you have a history of making on-time payments on credit accounts, such as loans or credit cards.


Late payments, defaults, or bankruptcies can have a significant negative impact.


Key Takeaway? Make sure your payments are in full and on time.


Credit Utilization


This refers to the amount of credit you currently use compared to your total available credit limit. A lower credit utilization ratio is generally considered better, as it demonstrates responsible credit management.


Lenders like to see credit utilization under 30%. Higher usage will negatively affect your score.


Key Takeaway? Use your credit cards sparingly and only borrow what you need. It's best to pay credit cards off in full each month. If you carry balances, work to pay them down or off completely.


PS: But don't close them! Closed accounts affect your total purchasing power and the length of your credit history, which can impact your score negatively if it raises your credit utilization ratio or shortens your recorded credit history.


Length of Credit History


The length of time you have been using credit is also considered. A longer credit history provides more data for lenders to evaluate your creditworthiness. It considers factors like the age of your oldest credit account, the average age of your accounts, and the time since your last activity.


Key Takeaway? It's best to keep accounts open, even if they're paid off. The longer you show you've been borrowing money (responsibly), the better. It's also wise to periodically use your credit cards to show activity, such as for gas or groceries, and pay them off promptly.


Credit Mix


This considers the variety of accounts you have, such as credit cards, loans, mortgages, or retail accounts. A diverse credit mix can positively influence your score by showing you can manage multiple financial products responsibly. However, it is not a crucial factor.


Key Takeaway? The more variety, the better. Lenders like to see a mix of credit cards and personal, student, auto, or home loans on your credit history. This factor has less impact but does still affect your score.


New Credit


Opening multiple new credit accounts within a short period may suggest increased financial risk. Scoring models consider the number of recently opened accounts and credit inquiries made by lenders when calculating your score.


Key Takeaway? Take on a manageable amount of debt; only borrow what you need. Lenders like to see reasonably spaced accounts. Also, your score will likely drop a few points when you apply for any new type of credit.


PS: Some types of credit, like mortgages, don't negatively affect your score if you shop around within the same time frame (say, a few weeks). So if you're ready to shop for a home, don't hesitate to get quotes from multiple lenders to compare rates and terms. You won't be penalized for this!


Public Records and Negative Information


This includes bankruptcies, tax liens, civil judgments, and other derogatory public records. Negative information can significantly impact your credit score.


It's important to note that different credit bureaus and scoring models may weigh these factors differently and have their own algorithms for calculating credit scores.


"If there's information in your credit history that's correct, but negative — for example, if you've made late payments — the credit bureaus can put it in your credit report. But it doesn't stay there forever. As long as the information is correct, a credit bureau can report most negative information for seven years, and bankruptcy information for ten years."


You have the right to dispute mistakes on your credit report. For details on this process, visit the FTC's Consumer Advice Page on Disputing Errors on Your Credit Reports.


Key Takeaway? It's important to check your information regularly for fraudulent activity or incorrect reporting. You can obtain your credit report for free at


To Sum It All Up


Improving your credit score requires responsible financial habits and consistent effort over time. This isn't a "quick fix" situation - the key is showing that you can responsibly and consistently manage borrowed funds.


Making on-time payments, keeping your credit card utilization below 30%, and paying off debts can all help boost your score.


Per the FTC's website, "Through December 2023, everyone in the U.S. can get a free credit report each week from Equifax, Experian, and TransUnion at Also, anyone in the U.S. can get six free credit reports per year through 2026 by visiting the Equifax website or by calling 1-866-349-5191. That's in addition to the one free Equifax report (plus your Experian and TransUnion reports) you can get at"


Stay patient and committed to your credit journey. Check your reports regularly for fraudulent activity and dispute errors, and only borrow what you need. You've got this!


If you're ready to explore preapproval and see how much house you can afford, our in-house lender is ready to help!


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