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Your credit scores help lenders make decisions about whether to say yes to your request for a loan or line of credit. While a mortgage company may take a closer look at your credit report’s contents, many lenders check your FICO credit score for a quick snapshot of your overall creditworthiness.

Credit scores and credit reports make lenders’ jobs easier when it comes to deciding whom they’ll trust to pay them back on time.

Your credit score and credit report represent a summary of your financial activity over the past seven to ten years. If you’ve recently borrowed money and repaid the loan as agreed with on-time payments, have a good mix of different types of credit, and haven’t borrowed more than 30% of the available credit across all your credit cards, there’s a good chance that you also have a healthy credit score.

There are some major differences between your credit score and your credit report. It’s important to understand how credit scores and credit reports work together so you can successfully manage your finances.

What is a credit report

There are three major credit reporting bureaus in the United States. They collect data about your personal payment history, various financial accounts, and personal information like your address, contact information, and employer.

Your credit scores are based on information contained in your credit files from TransUnion, Equifax, and Experian. These three credit reporting agencies don’t generate information; they merely organize the data sent to them by your creditors.

When you apply for a personal loan, mortgage, auto loan, or credit card, the lender checks in with one or more of these three credit reporting agencies to find out how much of a risk they may take by lending you money. The lender sets the criteria; the credit bureau provides the information.

Before any business can look at your full credit report or find out your credit score, they must get your permission. The credit bureaus must abide by federal laws about who can access your credit information and under what circumstances they may do so. When a lender looks at your credit report with the intention of evaluating you for a loan or credit card, it’s called a “hard pull” inquiry.

Unless you’ve specifically asked the credit bureaus to block access to your credit report, it’s possible for a lender, a business, someone conducting a background check, a potential employer, or a potential landlord to conduct a “soft pull” on your credit report. Typically, they need your address and full legal name.

What is a credit score

The most common credit score is the Fair, Isaac, and Company (FICO), created by a company based in California. Your FICO score is a number between 300 and 850. About 90% of lenders who use credit scores use the FICO score to help them understand consumer risk on a case-by-case basis. It’s most frequently used by lenders to set interest rates, determine the terms of a loan, and manage your account.

The other common credit scoring model is the VantageScore 4.0, which also ranges from 300 to 850. This credit scoring model can generate accurate information about consumers with dormant credit histories. There are about 30 million American consumers without a FICO credit score. VantageScore can provide potential lenders with the credit information needed for these applicants.

The lender decides which scoring model to use when determining whether to approve an application for credit. The credit bureaus and credit scoring models provide timely information about an individual’s financial habits and debts to help the lender make a decision.

Credit scores are not included on credit reports. Experian, Equifax, and TransUnion are three separate companies that are not affiliated with FICO or VantageScore.

Defining good credit

Good credit is usually classified as a score above 670. If your score is above 740, you are likely to be quickly approved for financing with the lowest interest rates and most favorable terms.

People who have good credit do certain things to maintain that status. They pay their bills on time, every time. They are aware of their credit limit on credit cards, and they don’t carry a balance from month-to-month of more than 30% of their total available credit across all their revolving charge accounts.

In the United States, the average credit score is between 669 and 699. This is the highest average since the 2008 Great Recession, indicating that as a whole, Americans are recovering financially.

Defining bad credit

While a credit score between 580 and 669 is considered “fair” by many lenders, if your score dips below 580, you’ll find it difficult to get approved for a loan or credit card.

Certain financial products specially designed for those with bad credit may be available, but you’ll pay much higher interest rates and fees to borrow the money. In the lending industry, bad credit is also called, “sub-prime” credit.

If your credit score is below 600, you may find it difficult to secure a cell phone contract, rent an apartment, or get a good rate on car insurance. You’ll also pay more for utility account deposits, and you may even be denied a job offer if the potential employer uses credit scores to screen applicants.

About 14% of the population in the United States doesn’t have a credit score. These people also can not qualify for most mainstream financial products. Often referred to as the “credit invisible” population, they may have even fewer choices than those with bad credit.

Factors that affect your credit score

There are five main parts to your FICO score. New information is weighted more heavily than old information, and except for a few specific types of accounts, reports of activity more than seven years old should not affect your FICO score.

Your payment history

Payment history makes up 35% of your FICO credit score. Making payments on your credit card, auto loan, mortgage, and personal loan accounts on time and as promised is the best thing you can do for your credit score.

Credit utilization

If you have revolving charge accounts like credit cards and store cards, they each have a set limit of money you can charge. The percentage of your total available credit that you’ve charged makes up 30% of your FICO credit score. FICO’s opinion about credit utilization, in general, is that you should never have more than 30% of your available credit across all cards charged at once. So, if you have three credit cards, with $4,000, $2,000, and $3,000 limits, you have $9.000 in total available credit. If you carry a balance of $1,000 from month-to-month on each card, your total credit utilization is 30%. Using more of your available credit than this without paying it off each month could hurt your credit score.

Length of credit history

The FICO credit scoring model considers the age of your oldest account, the average length of time you’ve had open accounts, and the length of time since your latest transaction when they calculate your length of credit history. This number represents 15% of your FICO credit score.

People who are new to credit may have a lower score in general than those who have a long history of account activity. You may hear financial experts say you shouldn’t close unused credit card accounts. Doing so could shorten the length of your credit history and hurt your FICO score.

New credit

Opening too many new lines of credit at once could hurt your score. New accounts not only lower the average age of your credit lines, but it also indicates that you may be acting irresponsibly by taking on more debt than you can handle at once.

Credit mix

This also accounts for just 10% of your total FICO credit score, according to experts. It merely refers to the different types of financial accounts you own. Someone who has a mortgage, auto loan, and two credit cards will fare better in this category than someone who has four credit cards.

This information, compiled over time by financial experts, and supported by FICO, isn’t the exact formula that FICO uses. That formula is proprietary, so no one knows the finer details of how FICO calculates scores.

Factors that do not affect your credit score

There are laws about what information credit scoring models like FICO can and cannot use to calculate your credit score. The Equal Credit Opportunity Act (ECOA) of 1974, exists to protect consumers from bias and discrimination on the basis of race, sex, religious affiliation, and other factors that have nothing to do with a person’s ability to manage their financial affairs responsibly.


Your income isn’t included in your credit report. So, you may have a low income and excellent credit, or make a lot of money and have a poor credit score.

Marital status

There’s much confusion about what happens to your credit scores when you get married. Although it’s possible to apply for credit and loans on a joint application to have the lender consider all household income and both of your credit histories, a change in marital status does not affect your credit score. It’s also not recorded on your credit file when you marry or divorce.

Debit card activity

Although your debit card may have a Visa or Mastercard logo, banks and credit unions do not report debit card activity to the three major credit reporting agencies. This is different from having a secured credit card, which helps build credit for people who have had financial problems in the past. You provide a deposit amount, and your credit limit is equal or even a bit higher than the deposit. Your payment history with a secured card is reported to the three major credit reporting bureaus.

Paying a small business charge account

Most small businesses that extend credit to their customers do not report account activity to TransUnion, Equifax, or Experian. To be sure, ask them if they regularly report account activity.

The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the ECOA in response to abuses perpetrated by the financial industry leading up to the 2008 Great Recession. This act helps apply protections to newer lending practices. Here are a few things the Dodd-Frank Wall Street Reform and Consumer Protection Act covers:

• Credit card companies and lenders must offer relevant information about interest rates and payment terms in an easy-to-read and understandable format. This part of the law makes it easier for people who don’t have much experience with credit to understand the terms of their agreement.

• Mortgage brokers cannot make more money7 or receive bonuses when they close a loan with more fees or higher interest rates.

• The Consumer Financial Protection Bureau (CFPB), appointed by the Dodd-Frank amendment, now works to prevent predatory mortgage lending.

How to get your credit report and credit scores

You can get a copy of each of your full credit reports from TransUnion, Equifax, and Experian once every 12 months at no charge. Federal law gives everyone with a social security number this right.

To access your reports, visit www.annualcreditreport.com. You’ll need to provide some personal information to get your credit reports.

If you have a credit card but do not receive credit alerts or information about changes to your FICO credit score, look around on the company’s online account access site to find out if they offer this service for free. Many credit card companies have an “opt-in” process for free credit monitoring. This is a great way to access your FICO credit score at no charge.

Monitoring your credit reports for inaccurate information is essential to your overall financial health. More than 40% of credit reports have at least one piece of information on them that’s incorrect. These mistakes could lower your FICO scores, causing you to pay higher interest rates or even get denied for credit.

Part of understanding credit reports and credit scores is monitoring your own for changes and taking charge of your credit profiles.

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