Understanding Your Credit Score

By Katie Wornek, UHEAA

What is a credit score and how is it calculated?


Before a lender will consider offering you a loan or line of credit, they need to feel confident in your ability and likelihood to repay debt. This is referred to as “credit worthiness” and it is usually measured by a credit score. The following factors are used to calculate your credit score (the amount of weight given to each factor depends on the type of credit score):


  • Payment history: The amount and frequency of your payments is tracked over the life of your debt. In order to maintain a good credit score, make consistent strides toward paying down your debt and avoid late or missed payments.
  • Amount you owe: Lenders want to know how much of your available credit you are using. Lowering the balances on your credit cards and loans or paying off debt altogether will help you maintain a good credit score.
  • Length of credit history: The longer you demonstrate your ability to responsibly repay debt, the more trustworthy you appear to lenders.
  • Types of credit: Different types of debt require different types of planning and money management skills. For example, paying a $500 car payment every month for 5 years is a bigger commitment than paying off a low, short-term credit card statement. If you successfully balance multiple types of credit, you demonstrate that you have the skills to manage a variety of debt, which can bolster your credit score.
  • New credit: Too many new lines of credit can indicate you are struggling with your cash flow and may encounter difficulty repaying your debt.



What is a good credit score and how does my credit score affect me?


The most common type of credit score is the FICO score, which ranges from 300 to 850. FICO scores are broken into categories:


  • Excellent: 800 or more
  • Very good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Poor: 579 or less


Lenders will use your credit score to decide whether to grant you credit, determine your interest rate, and set your borrowing limit. Individuals who are not lenders but who could still be affected by your ability to manage money, such as your landlord or employer, may also analyze your credit score to determine how responsible you are. A “very good” or “exceptional” FICO score can help you obtain credit easily and qualify for lower interest rates. A “poor” or “fair” FICO score could make it difficult to obtain credit or may result in fees, deposits, and higher interest rates, costing you more money.



Where can I find my credit score?


There are three main consumer-reporting agencies in the United States that track credit scores:


  1. Equifax
  2. Experian
  3. TransUnion

Each consumer-reporting agency could assign you a different credit score. For example, your lender may report information about your loan to one consumer-reporting agency but not the others. Or your lender may report different information to each consumer-reporting agency on different days (if, for instance, you made a payment after your lender contacted Equifax but before your lender contacted Experian and TransUnion).


Federal law allows you to request a free credit report once a year from each of the three consumer reporting agencies – these reports include your balances, payment history, and length of credit but do not include your credit score. You can pay Equifax, Experian, and Trans-Union a fee to see your credit score, but you may be able to check it for free by:


  • Reading your loan or credit card statement (depending on your lender)
  • Visiting a nonprofit credit counselor or Housing and Urban Development-approved housing counselor
  • Using a free credit score service (just be sure to read the fine print to see if your “free” credit score requires you to pay for another service or subscription from these companies)


How can I improve my credit score?


From owning a home to starting your own business, a good credit score can help your dreams become reality. Consider developing a schedule and monthly budget to manage your cash flow and pay down your debt in a timely manner. You should also monitor your accounts and credit reports as often as you can to detect and prevent credit fraud or identity theft. You can also check out our “4 Simple Tips for Growing Your Credit Score” blog for more ideas on strengthening your credit worthiness.