Everyone knows that their credit score impacts their ability to get loans, or the terms of the loans they are able to receive. Many understand the importance of having a “good” credit score, but a lot of people are unsure how to change their credit score, or how credit scores are even calculated. Knowing your credit score, how credit scores are determined, and what can be done to improve your credit score can help people decide the next step in their financial lives.

The Basics

What is a credit score?

A credit score is a number assigned to an individual that reflects their financial history so that a creditor can easily determine if that person’s creditworthiness and the risk involved in giving them a loan (FTC, MyFico). Your credit score will generally range from 300-850, with the higher numbers being an indicator better credit history (MyFico). Three different credit bureaus track your credit history and report your score: TransUnion, Equifax, and Experian (MyFico). The scores given may differ based on what information the credit bureau has but are generally similar.

How is it calculated?

Scores are calculated based on the individuals financial history and current standing. Someone who has always paid their bills on time, does not carry a balance from month to month on their credit cards, and who has had all their lines of credit for a very long time will generally have a very high score. Someone who has maxed out their credit cards, is frequently late on payments, and who has only recently opened their credit card accounts will have a low score (FTC). Additionally, if you apply for credit with multiple lenders, you may show multiple “inquiries” on your credit report, which can lower your score (FTC). Credit scores may not take into consideration a consumer’s race, religion, national origin, marital status, or gender when calculating (FTC).

How are credit scores used?

Credit scores are used primarily by creditors who are considering giving you credit, whether in the form of a loan, a credit card, or a rent-to-own agreement. Credit scores or your credit report (the information that was used to determine your score) can also be looked at by prospective landlords, employers, or even debt collectors under certain restrictions (Experian). Your credit score may then affect your ability to get credit from a creditor, or if you are able to get credit, the amount of interest you pay or the total amount of credit given. Someone with a lower credit score will have less access to credit, such as only being given a $500 limit on their credit card. They could also only qualify for a secured credit card. A lower credit score can also mean a much higher interest rate. This is all because someone with a low score is considered a high risk to the creditor, or someone who is unlikely to pay the creditor back.

How do I find out what my credit score is?

The Fair Credit Reporting Act (FCRA) requires that you be allowed to view your credit score for free once every 12 months. You can access your credit score here via the Federal Trade Commission’s website. They include general questions and answers as well as information on how to request your credit score.