Your credit score is one of the most important components of your application for a line of credit. Your credit score is a determining factor in your mortgage and auto loan terms, credit card rates and insurance premiums. Some employers and landlords also take your credit (though likely not your actual credit score) into consideration. But what exactly is a credit score and how is it calculated?
Your credit score is a three-digit number, calculated based on information listed in your credit report, that lenders use to measure your creditworthiness and the likelihood you will default on your payments. Your credit score may range from between 300-850, the higher the credit score the better. The three main credit bureaus—Experian, Equifax and TransUnion—each hold a copy of your credit report, meaning that you actually have three credit scores, or one from each bureau.
How Is Your Score Calculated
There are different types of credit scoring models, and each may vary slightly. The details of your credit report influence how your credit score is calculated. These details include your payment history, debt balances, length of credit history, types of credit accounts you carry and how often you apply for credit. As these details change on your credit report, your credit score may fluctuate.
[Related: All About Credit Scores]
What Makes Up A Good Credit Score?
Lenders like to see that you’re managing your accounts responsibly, and there are a number of ways you can prove that you do. Paying your bills in full and on time and keeping your debt balances low show credit issuers that you can manage your credit line. Holding accounts for a long period of time and refraining from opening new lines of credit within a short time period can also improve your score. Lenders also like to see that you can handle a mixture of credit. This includes revolving debt, such as credit cards and non-revolving debt, such as a mortgage or auto loan.
Are There Actions That Hurt Your Credit Score?
Maxing out credit cards, paying bills late and constantly applying for new credit cards can have a negative impact on your credit score. Not having enough credit in your name will also cause your score to stay low.
Your credit score plays a significant role in your credit terms, insurance premiums and other important aspects of your life, so make sure you take steps to keep it healthy.
Note: An earlier version of this article noted that some employers take credit scores into consideration when evaluating job candidates. Employers very rarely if ever at all consider credit scores. They may, however, use credit reports when making hiring decisions. Credit scores are based on the information in credit reports.