What Is a Credit Score — and What Actually Changes It?
What actually makes your credit score go up or down? Learn how payment history, credit-card balances, account age, applications and other factors affect your credit—and which common credit myths you can ignore.
By Mike Torres — Payday & Purpose
Few three-digit numbers seem to have as much power over your financial life as a credit score.
It can affect whether you're approved for a credit card, what interest rate you pay on a car loan, and how expensive it is to borrow money for a home.
Yet plenty of people aren't entirely sure what their score represents—or why it suddenly went up or down.
The good news is that credit scores aren't mysterious once you understand what they're measuring.
What Is a Credit Score?
A credit score is a number designed to estimate how likely you are to repay borrowed money as agreed.
In other words, lenders use information from your credit history to help answer a basic question:
How risky would it be to lend this person money?
There are different credit-scoring models, but FICO scores are among the most widely used. They generally range from 300 to 850.
Higher scores usually indicate lower lending risk.
You'll often see scores grouped into categories such as poor, fair, good, very good and exceptional. Don't become too obsessed with the exact labels, though. Different lenders and scoring models can use different standards.
What's more important is understanding what moves the number.
Payment History Matters Most
The simplest rule in credit scoring is also the most important:
Pay your bills on time.
Your payment history is a major factor in determining your credit score.
A payment that's a few days late may result in a late fee, but lenders generally don't report a missed payment to the credit bureaus as late until it is at least 30 days past due.
Once a late payment appears on your credit report, however, it can hurt.
The longer a payment goes unpaid—and the more frequently payments are missed—the more serious the damage can become.
If you're trying to improve your credit, consistent on-time payments are one of the best places to start.
How Much of Your Credit Are You Using?
Another important factor is credit utilization.
Suppose you have a credit card with a $5,000 limit and your reported balance is $4,500.
You're using 90 percent of your available credit.
That can make you appear more financially stretched than someone using a much smaller percentage.
Now suppose the same card has a $500 reported balance.
You're using only 10 percent.
Lower utilization is generally better for your score.
You've probably heard that you should stay below 30 percent. That's a useful guideline, but it isn't a magic threshold. In general, the lower your utilization, the better, as long as you're still using credit responsibly.
And no, you don't need to carry a balance and pay interest to build credit.
You can pay your credit card balance in full every month.
The Age of Your Accounts Matters
Credit scoring also considers how long you've been managing credit.
An account you've maintained responsibly for many years provides more history than one you opened last Tuesday.
That's why closing an old credit card isn't always beneficial, even if you rarely use it.
Closing the card can eventually affect the age of your credit history, and it immediately removes that card's credit limit from your available revolving credit—which can increase your utilization.
That doesn't mean you should never close a credit card. A card with an expensive annual fee or one that encourages overspending may not be worth keeping simply for a credit score.
Your finances come first.
Applying for New Credit Can Affect Your Score
When you apply for certain types of credit, a lender may perform what's called a hard inquiry on your credit report.
A hard inquiry can cause a small, temporary reduction in your score.
That doesn't mean you should be afraid to apply for credit when you genuinely need it.
But applying for several credit cards in a short period can make you look riskier to lenders.
There's also a soft inquiry, which doesn't affect your score.
Checking your own credit is a soft inquiry.
So let's kill one persistent myth:
Checking your own credit score does not hurt your credit.
Check away.
Credit Mix Plays a Smaller Role
Scoring models may also consider the different types of credit you've successfully managed.
For example, someone might have experience with a credit card, auto loan and mortgage.
That doesn't mean you should go borrow money just to create a more impressive collection of accounts.
Paying interest unnecessarily in pursuit of a few credit-score points would be missing the point spectacularly.
Credit mix can help, but responsible management matters more.
Why Did My Score Suddenly Drop?
Sometimes a credit score changes even though you didn't do anything obviously wrong.
Your credit card company may have reported a higher balance than usual.
You may have opened a new account.
An old account might have fallen off your credit report.
Your available credit may have changed.
Or the score you're looking at may use a different scoring model from the one you saw previously.
That's another important thing to understand:
You don't have just one credit score.
Different scoring models and different versions of those models can produce somewhat different numbers using information from your credit reports.
What Actually Helps Your Credit Score?
If you're trying to build or rebuild credit, don't search for tricks.
Focus on boring things that work:
Pay every bill on time.
Keep credit-card balances low relative to their limits.
Avoid opening accounts you don't need.
Keep older accounts in good standing when it makes financial sense.
Review your credit reports and dispute genuine errors.
Then give it time.
Credit improvement usually isn't dramatic. It's the result of months and years of showing that you can handle borrowed money responsibly.
Your Credit Score Isn't a Grade on Your Life
This may be the most important thing to remember.
A low credit score doesn't mean you're irresponsible, unsuccessful or bad with money.
People go through divorces. Jobs disappear. Medical bills happen. Businesses fail. Emergencies turn into debt.
A credit score doesn't know the story.
It only evaluates information in a credit file.
If your score isn't where you want it today, concentrate on the things you can control from this point forward.
Because credit history has something useful built into its name:
History keeps moving.
And the financial decisions you make next can eventually become the history your future credit score is based on.
