What is a credit score and how is it calculated?
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Your credit score affects many areas of your financial life, from getting approved for a credit card to the interest rate you’ll pay on your mortgage. It’s important to understand the number and how it is calculated so you can set yourself up for financial success.
What is a credit score?
A credit score is a number that helps lenders, like banks, insurance companies and landlords assess how well you’ve managed your financial obligations. It is one of several factors they may consider when deciding a rate of pay for services, whether to loan you money or whether to enter into a business agreement.
What makes up your credit score?
Your credit score is determined by using information in your credit report. There’s no single formula for calculating a credit score, but here are the factors that FICO, the leading credit score provider, generally considers:
Before lenders extend credit to you, they want to know if you pay your bills on time. Always make at least the minimum payment by the due date.
High balances can hurt your score. Lenders prefer that you use less than 30 percent of your available credit. You may be able to check what percent you’re using on your account page on your bank’s website.
Your score considers how long you’ve been using your credit accounts. Generally, longer is better.
Having a mix of loan types—such as credit cards, student or auto loans and mortgages—is good for your score. It shows lenders you can handle multiple payments at the same time.
Lenders see you as a bigger risk if you apply for, or open, several new credit accounts in a short period of time.
The weight assigned to each category can vary depending on your individual circumstances. If you’re just starting to establish credit, the factors used to calculate your score may be different than for someone who has a longer credit history.
Did you know?
Closing old credit card accounts can hurt your credit score. That’s because calculations consider the length of your credit history and your total available credit. Closing an account, even if you’re not using it, could reduce both. Instead, consider using the card occasionally for a small purchase and paying off the balance in full. There are other ways to improve your credit score, too.
What do the numbers mean?
Credit scores typically range from 300 to 850 and they can change monthly—for better or worse—based on your actions. Scores for most people—67 percent—fall in the “good” range and above.
The average American’s credit score
Sources: FICO and Experian
Where can I get my credit score?
A growing number of banks, loan companies and credit card issuers, including Bank of America, provide scores for free on statements or through online banking and mobile apps. If your bank doesn’t provide that service, you may have to pay to get your credit score. You can buy your FICO credit score at Myfico.com.
Under federal law, you’re entitled to a free credit report every year from each of the three major credit bureaus—Equifax, Experian and TransUnion—but many people are surprised to learn that the credit score usually isn’t included in the report. Remember, the credit bureaus don’t always collect the exact same information, or evaluate it in the exact same way, so your score from each one could be different.
Quick tip
Fixing credit report errors, such as the same debt listed more than once or accounts incorrectly reported as late or delinquent, is one of the quickest ways to boost your credit score. It’s a good idea to check your reports every year via AnnualCreditReport.com. The federal Consumer Financial Protection Bureau has a helpful guide for correcting mistakes.
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