The Ultimate Guide to Understanding Your Credit Score

How to Understand Your Credit Score
If you have been told you have “no credit” or “bad credit,” or even just that your credit score could be higher, you probably are wondering exactly what that means.

This guide will explain what credit scores are, how how they are determined and checked, and how you can take steps to improve yours.

When a borrower goes to apply for a mortgage or another type of loan, his or her credit score will be checked and assessed by the lender. If the score does not meet a certain minimum, the customer will likely be turned down. If a loan is extended in spite of bad credit, it will usually be with a higher interest rate and stricter terms.

Because your credit score can have such a broad-reaching effect on your financial life, it is something which should not be left to chance. Take proactive steps to regularly monitor your reports and your score.

Once you have established credit, pay your bills on time and manage your accounts with care. That way when you need it, you will have the high credit required to qualify for the best rates, cards, and financing opportunities.

Credit Score Basics


Every borrower is assigned a credit score. This is a numerical value, usually ranging between 300-850. If the number is higher, it means that you are less risky and more trustworthy. If it is lower, you are a higher-risk customer.

Technically, the phrase “credit score” is somewhat vague. There are multiple scoring systems used to establish creditworthiness. If you live in the US, the primary system which is most relevant to you is the FICO credit system.

FICO Score

A FICO score is comprised of the following reported data:

  • 35% Payment History: Paying on time, in full and consistently will improve a borrower’s payment history.
  • 30% Amounts Due: The total amount of the consumer’s current debts is another significant component of his or her score.
  • 15% Length of Credit: Newer borrowers are riskier than established ones.
  • 10% Type of Credit: This component includes data on whether a customer has mortgages, credit cards or lines of credit, personal loans, auto loans and so forth. Having a mix is good, but only if that mix is well-managed.

Credit Score Ranges

Whether a customer has “good” or “bad” credit or so forth depends on what range his or her credit score falls into. The table below contains the credit score ranges.

Type of Credit Ranges
Poor (a.k.a. “bad”) Under 630
Average 630-690
Good 690-720
Excellent 720+

No Credit

What about borrowers with no credit? Concerning risk, a borrower with no established credit will generally be treated as if he or she is as risky as someone with a “poor” rating — or even worse. There is an exception for young people. It is much easier to qualify for your first credit card in college than it is after graduating.

Understanding the Impact


Average persons who don’t have much experience in taking loans and being indebted might find it difficult to fully understand the small print without additional informational support. The slight difference between Credit Scores and Credit Rating, along with the explanation of the impact of credit scores is explained below.

Credit Score vs. Credit Rating

You may have heard people talk about your “credit rating” along with your “credit score”. Is a credit rating the same as a credit score, or are these two different things?
Your credit score and credit rating are not identical. Here is the difference:

  • You have multiple credit reports. Your credit reports are exactly what they sound like. They are real reports on your activities as a borrower. They do not attempt to make statements about your risk level on their own. They simply list information.
  • As mentioned earlier, you do have multiple credit scores as well. A computer reviews the information in your reports to generate your score. Unlike the report, the score does make a direct statement about the risk you represent.

What Impact Does Your Credit Score Have?

A borrower’s credit score can have a significant impact on his or her financial future. Borrowers with low credit scores may not be able to:

  • Qualify for a non-secured loan, credit card, or line of credit.
  • Enjoy the most exciting and valuable credit card rewards.
  • Buy their dream home.
  • Procure the financing needed to start up a business.
  • Pay low-interest rates and fees on mortgages and other forms of financing.

Even if you are not making use of credit at this time, you never know when your circumstances could change in the future. Poor credit or no credit may mean missing out on a life-changing opportunity.

How to Check Your Credit Score


A consumer who is struggling to qualify for a loan may be tempted to shotgun out many applications one after the other in the hopes of getting swiftly approved.

Unfortunately, this can adversely impact one’s credit score. When lenders perform “hard” credit checks, the borrower’s score takes a hit each time. The result is that it can become progressively harder to qualify.

Credit Bureaus

For this reason, it is wise to know one’s credit score in advance of applying for a loan. Each year, you may order one free credit report from each of the three major credit bureaus. These are:

  • Equifax
  • Experian
  • TransUnion

Understanding Your Credit Report

Note that the report you receive will not include an actual numerical score. It will merely list information which can be used to calculate a score.

This provides an opportunity to check the report for accuracy. Dispute any false entries in the story to get them corrected. If you wish to know your numerical score, you may order that as well for a fee.

Avoid the temptation to order all three reports at once. It is smarter to space them out. That way you can get updates on whether your score is improving or not throughout the year. Just be aware that there may be discrepancies from one agency’s report to the next. All three reports are generated differently.

How to Boost Your Credit Score


What should a borrower do if his or her credit score is on the low side? Taking these steps can build good credit:

  • Pay off or consolidate your debts where possible.
  • Make timely payments on debts going forward. Setting payment reminders may help with this.
  • Use credit cards and lines of credit you have regularly.
  • Do not maintain a high balance on your credit accounts.
  • Avoid arbitrarily opening or closing credit card accounts. Doing so may temporarily adjust your score, but will often have long-term negative consequences.
  • Add credit accounts gradually (not all at once) if you are just starting to establish yourself.

Ways to Establish Credit

Consumers with no credit may attempt to establish credit through the following methods:

  • Accepting an offer on a student credit card (if one is offered)
  • Applying for a store credit card (though many stores will still only approve individuals with established credit)
  • Applying for a secured loan
  • Having someone more creditworthy co-sign on a loan
  • Getting added to another person’s credit card as an authorized user
  • Paying rent (some landlords report rent payment history to the credit bureaus)

Works Cited

1 ValuePenguin Inc.\”Credit Scores: What are they? How do they work?” https://www.valuepenguin.com/credit-scores

2 The Balance “https://www.thebalance.com/how-credit-scores-work-315541” https://www.thebalance.com/how-credit-scores-work-315541

3 Money “What Is My Credit Score, and How Is It Calculated?” http://time.com/money/collection-post/2791957/what-is-my-credit-score/

4 TransUnion “How Credit Scoring Works ” https://www.transunion.com/blog/credit-advice/how-credit-scoring-works-transunion