What Factors Make Up Your Credit Score And What You Can Do To Raise Your Score?


Most adults have a credit profile and credit score but do not necessarily understand how this data is tabulated and how it affects your financial life. Your credit score could determine if you get approved on a credit application and how much you will pay in interest and fees. Improving your understanding of what credit is and what steps you can take to build a strong credit profile could make it easier to get a loan and allow you to save money and improve your personal finances in the process.

Key Takeaways
  • Credit affects more than your ability to get a loan. Utility companies, employers, landlords, and insurance companies often perform a credit check as part of the application process.
  • Multiple credit scoring agencies use different calculations to determine your credit score.
  • While you have multiple credit scores, all companies use five essential factors when determining your credit score.
  • A credit report compiles your debt payment history, and the credit score calculates your creditworthiness based on that data.
  • A diverse mix of credit such as mortgages, revolving credit accounts, and private store charge cards can contribute to a healthy credit score.
  • Your payment history remains on your credit file and affects your credit score for seven years.

What is Your Credit Score?

Consumer credit scores are a three-digit mathematical calculation, ranging between 300 and 850 that provides a screenshot of how you manage debt. Higher credit scores increase the likelihood that a creditor will approve your loan request, or a company will grant your application.

Apply for a Personal Loan Today

Choose Your Loan Amount

What Your Credit Score Does and Does Not Measure

Credit scores measure how you pay debts by tracking your payment history for seven years. The algorithm includes on-time payments, the number of accounts you have, and what balances you keep.

While your credit score evaluates debt management skills, it is possible to have good credit without debt or have poor credit and pay all your bills on time. For example, you can actively use credit cards but pay them in full each month, eliminating interest charges and revolving debt.

You could also pay cash for purchases, rent, and own your car, leaving you with a poor credit profile even though you pay bills responsibly. Not all accounts report your payment history to the credit bureaus. Consumers with no debt might have a strong financial balance sheet, but a low credit score. Not because they don’t pay their debts, but because they never finance purchases.

Credit does not measure your net worth, the level of savings, investment portfolio, or work ethic. It does not rate your business acumen or work history, which directly impacts your financial strength. It also does not recognize a financial hardship that could lead to legitimate financial struggles through no fault of your own.

Get Help Reducing Your Debt

Choose Your Debt Amount

Why Credit is Important

Your credit score can directly affect your out of pocket costs. A good score makes it easier to qualify for new debt, negotiate lower interest rates, and fewer fees. A low score could cost you money through fewer loan options, more expensive debt, higher insurance rates, and even limit your ability to get a job or secure housing.

Lenders use your credit score in the application process but also when deciding what loan terms to offer. Utility companies use credit to determine whether the account requires a deposit or could even prevent you from enrolling in a particular service.

When Credit Matters Less: The good news is that companies only check your credit at the time of application. If you do not plan to apply for a loan, change cell phone providers, or switch utility companies in the near future, your credit becomes less critical in the short term. The exception is credit card companies who could reduce your credit line or close your account if you fall behind on other debts, even if you are up to date on that account.

The Key Difference Between a Credit Score and a Credit Report

The credit profile consists of two parts: your credit report and your credit score.

Creditors can report account activity to the three major credit bureaus, which then compile the information into a credit report. Your credit report creates a record of your credit history.

There are three primary sections of your credit report.

#1: The first section includes personal information such as your name, social security number, Birthdate, history of addresses you lived, and a list of employers.

#2: The second section is the most important and includes a history of all accounts reported to the credit bureaus. Home loans, vehicle debt, personal loans, and credit cards are common examples. The report tracks your account history for decades, but only includes your payment history for seven years.

The data collected consist of the companies you have accounts with when you opened the account, the current balance, the highest balance or credit limit, the last monthly payment, and a seven-year history of payments.

#3: The last section includes a record of companies that viewed your credit report in the previous two years, a list of data curated from public records, and collection or delinquent accounts. For example, utility companies do not typically report your payment history to the credit bureau. However, if you become late on your cell phone bill or power bill, the company could send the account to collections. At that point, the negative information will be on your credit file.

Your credit score is a mathematical calculation of your creditworthiness based on the data found in your credit report. If your report contains errors, it could hurt your credit score.

The Key Components That Make up Your Credit Score

Building an excellent credit score takes time and focused attention to making payments on time, keeping your credit balances low, and obtaining a good mix of different credit products. The three major credit bureaus all use proprietary algorithms to calculate your score. These algorithms are created by two major credit scoring companies: FICO and Vantage. Both companies use five key components to determine your credit risk. These include:

  • 7-year payment history with the most emphasis placed on the previous 12 months.
  • Credit Utilization ratio comparing debt balances of your revolving accounts and installment loans to your credit limits.
  • The types of accounts listed in your credit file.
  • Age of credit history measuring the length of time you maintained open credit accounts.
  • The number of inquiries for new credit. Companies account for price shopping by combining multiple queries for the same type of credit.

What is a Good Credit Score?

FICO and Vantage both use the same credit score range of 300 to 850. The lower your credit score is, the worse your credit.

Experian provides a detailed breakdown of specific credit score ranges:

  • 300-579 poor credit
  • 580-669 fair credit
  • 670-739 good credit
  • 740-799 very good credit
  • 800-850 excellent credit score

Why You Have Multiple Credit Scores

There are two primary reasons you have more than one credit score:

Credit scoring agencies use different algorithms. The two major credit scoring companies, FICO and Vantage, update scoring models every few years to reflect research updates, new laws, and lending trends. For instance, in 2020, FICO introduced the FICO 9 credit scoring model. The company also provides specialty scores for mortgages and auto loans, giving lenders 16 different scoring models to choose from.

Credit bureaus don’t report the same information. Each credit bureau contains a slightly different data set because not all companies report to all three major credit bureaus. When you obtain a credit score, it will indicate the credit bureau, scoring company, and model used. For example, you might receive a Vantage credit score using the FICO 3.0 credit scoring model based on information from your Experian credit report.

Financial services companies, credit card companies and lenders choose which company and scoring model to use.

Hard vs. Soft Inquiries and Why it Matters

Credit reports measure hard inquiries and soft inquiries. The main difference is a hard inquiry can lower your credit score, where a soft inquiry does not.

A hard inquiry occurs when you apply for new credit. You might buy a home, open a bank account, apply for a new account from a credit card issuer, or change utility companies, requiring a review of your credit. In most cases, you must approve the request before the company can pull your report. Your credit report tracks hard inquiries for two years and will affect your credit score for one year.

Soft inquiries do not impact your score and happen when you check your own credit, or when third parties review your report before sending you an offer. For example, your credit card company can conduct account reviews at any time along with employers, landlords, and insurance companies to evaluate your financial health.


How Long Does Credit Information Affect Your Credit Score?

Credit reports can list accounts and the average age of credit on your profile indefinitely. However, the report only tracks your payment history for seven years. Chapter 7 Bankruptcy is the exception, staying on your credit report for ten years, while a Chapter 13 Bankruptcy is reported for seven years..

The seven-year mark begins at the first late payment, provided you never again bring the account current. For example, if you miss a payment in January, then catch up the account in March, and make another late payment in October, the seven-year clock restarts in October.

On the other hand, if you miss six payments in a row and the creditor charges off the account or sells it to a debt buyer, the seven-year timeframe starts at the first missed payment. The sale of the debt, collection efforts, and other activity do not affect the seven-year timeframe.

How Accurate is Your Credit Score?

Your credit score is only as correct as your credit report, and you have the right to dispute errors in your file. Your credit report does not consider all delinquencies. For instance, as of April 2018, credit bureaus agreed to stop reporting judgments on credit files due to a court settlement.

What Are Credit Supplements?

Not all consumers have traditional lines of credit mortgages or installment debt, which can make it challenging to build a healthy credit file. Consumers will little or no credit history are referred to as “Thin File Consumers”. In an effort to make credit available to more people, credit agencies have begun allowing alternative credit sources, such as rental payments, utility payments, or cell phone payments, to be included in their credit scoring formulas. Credit supplements such as Experian BoostTM offered through Experian Consumer Services and UltraFICOTM offered by the Fair Isaac Corporation help consumers with limited credit, or those who need to rebuild credit, by creating a credit score using payment accounts as opposed to traditional credit accounts.

How Can You Build a Strong Credit Profile?

In order to build a good credit score, you must first obtain multiple types of credit, make timely payments over an extended period, and have a low credit utilization rate on revolving credit accounts by keeping low credit card balances. Lesser factors include the number and frequency of credit inquiries from credit applications, the number of loans versus credit lines, and the overall length of your credit history.

All credit is individual, based on your social security number. There are no joint credit files.

To establish or rebuild credit, a family member can add you as an authorized user giving you the benefit of their credit history. Authorized users gain access to credit, but don’t build credit in the process of using credit. Other options include a secured credit card or a co-signed loan.

Where Can You Get Your Credit Score and Report Free of Charge?

Equifax, Experian, and Trans Union are the three primary credit bureaus that maintain a database of information used to calculate credit scores. The website annualcreditreport.com gives everyone a free credit report from each credit bureau once every 12 months. Other companies like Credit Karma also supply free access to credit files, allowing you to view, monitor, and dispute inaccuracies on your report.

Free credit scores are not as readily available. Banks and credit card companies often provide free credit scores to existing clients. However, 90% of lenders use the FICO score, and most companies giving away scores use the Vantage score.

The Key Reasons You Should Understand and Track Your Credit

Lenders consider multiple factors when approving a loan, with credit being one of the key elements. Poor credit could limit your access to new loans or the ability to secure the best terms. Having reliable income, available assets, or substantial equity can mitigate a lower credit score.

Reviewing your credit report and score can also help stop fraud. A new account on your file or a sudden drop in your score could indicate fraudulent activity. Other indicators include addresses you never lived or a job you never held.

It is a good routine to review your credit at least annually and track your score at least quarterly to identify trends and help you take proactive steps to improve your credit score.

  • What is considered a good credit score?

    Credit scores range from 300 to 850. Credit scores below 580 are considered poor or subprime. Credit scores above 700 will qualify you for most of your lending needs.

  • How can I build positive credit?

    Credit scores use five key factors to calculate your score. These include your history of payments, your credit utilization ratio, the mix of loans and lines of credit, how often you apply for new credit, and the length of your credit history. The key to good credit is paying bills on time, keeping revolving lines of credit low in relation to the credit limit, having both loans and lines of credit, and apply for credit sparingly.

  • How can I improve my credit score when lenders won't approve a loan?

    Establishing credit can be tricky because lenders want you to have a payment history before offering you a loan. Effective ways to build credit include using credit supplements, getting a secured credit card, a family member can add you as an authorized user, or someone can co-sign a loan.

  • Can I check my credit score free of charge?

    Banks and credit card companies often give you access to a free credit score as an account perk. Be aware that most credit agencies give you free access to your Vantage score, where most lenders use the FICO score.

  • Why do I have multiple credit scores?

    Each credit scoring company uses several different scoring models. Lenders can choose which model to use. Credit bureaus also compile information on your financial history, and there will be differences between the information reported to each credit bureau. The result is each person has more than a dozen different credit scores.

  • Why did my credit score drop when I don't have any late payments?

    Even if you never miss a payment, your credit score can drop if take on too much debt. When your outstanding balances approach the amount of your credit limit, your credit utilization ratio goes up, which in turn can lower your credit score.