When you do business with lenders or credit card issuers, they report the payment history on your accounts to at least one of the three credit bureaus (Experian, TransUnion or Equifax). The bureaus, in turn, put that information into a credit report that contains your credit history and personally identifiable information.
Credit scores represent your creditworthiness and help lenders determine the likelihood that you will repay a debt as agreed. If you have car insurance, a loan or credit cards, the premiums you are paying and your interest rates may be determined in part by your credit scores.
While there are multiple credit scoring models, the FICO® Score* is one of the most commonly used by lenders and business to determine how reliable you will be in paying back a debt. You can get your FICO® Score for free from Experian.
What Does My Credit Score Mean?
When lenders pull your credit scores, they are typically using them to determine how likely it is that you will pay them on time if they issue you a loan or credit card. Sometimes credit scores are called risk scores because they help lenders assess the risk that you won't repay your debt as agreed.
It's important to note that credit scores are not stored as a part of your credit history. Instead, credit scores are generated when a lender requests your credit report, and they are typically delivered with the report. They represent a snapshot in time, which is why your credit scores can go up or down over time, depending on your behavior.
Understanding My Credit Score Factors
It's important to understand the factors that go into determining your credit scores so you know how to improve them if necessary. For the FICO® Score 8, the credit score version you will receive through Experian, there are five main factors that impact your score. They are all weighted differently:
- Payment History: Your payment history—how regularly you pay your bills on time—accounts for 35% of your score. Late or missed payments can negatively affect your score, while a pattern of making payments on time is the best way to keep your score high.
- Amount of Debt: The amount of debt you have relative to how much is available to you, sometimes referred to as your credit utilization ratio, accounts for 30% of your score. This is calculated by dividing how much credit you use on a monthly basis by the total amount of credit available to you. So if you have three credit cards with a combined credit limit of $10,000, and you have a total combined balance of $3,000 on all three cards, your utilization ratio is 30%. Most experts recommend keeping your ratio below 30%, and for the best scores, below 10%.
- Credit History Length: How long you've used credit, including your oldest and newest accounts—as well as the average age of all your open accounts—accounts for 15% of your score. Generally, the longer you've used credit, the higher your scores.
- Amount of New Credit: The total amount of new credit accounts for 10% of your score. This takes into consideration how many accounts you've opened recently and how many recent hard inquiries you have on your credit report. Too many new accounts and inquiries could indicate greater credit risk.
- Credit Mix: The variety of types of credit you're using accounts for 10% of your score. If you have different kinds of credit, like credit cards and installment loans, you'll score higher than if you only have one type of credit, such as retail cards.
When you receive your score, you should also get some guidelines on your score profile and why your score ranks where it does. This will include information on what's hurting your score and what's helping your score, as in the image below:
These guidelines will help you figure out what you need to keep doing to maintain a good score, and what you need to do to improve it. For example, if bad payment history is one of the reasons your score is not doing well, you should focus on making an effort to pay your bills on time. Consider automating your payments so you never miss them again.