How Do Credit Scores Work?

In July 2016, the Consumer Federation of America (CFA) and VantageScore Solutions reported that most consumers—more than 80%—knew basic facts about their credit scores, including that credit scores are used by lenders to approve or deny mortgages and by credit card issuers to approve or deny credit cards.

While it’s good that most people know the importance of credit scores, the same survey found that many consumers don’t understand credit score details. In other words, about how personal credit works and how credit scores work still confuses people.

How Are Credit Scores Created?

When you borrow money, whether through a revolving account, like credit cards, or an installment account, like an auto loan or student loan, the information is gathered by the credit bureaus. The data the bureaus keep in your credit files is the date used to calculate your credit scores.

When you apply for a loan or card, the bank or issuer may look at just your credit score or at your entire credit file. There are five major areas of information in your credit file that are used to calculate your score:

  • Payment history
  • Debt usage, also known as your credit utilization ratio
  • Age of credit accounts
  • Types of accounts or account mix
  • The number of hard inquiries on your credit, not soft inquiries

A good credit score includes a healthy mix of all these factors. Each factor though weighs differently toward a score. Payment history makes up 35% of your score. Debt usage 30%, credit age 15%, and account mix and credit inquiries each make up about 10% of your score.

How Are Credit Scores Used?

You have multiple scores and types of scores and there are different scoring models. The resulting scores and your credit file are used to determine your risk factor for future loans. The three-digit score is a numerical representation that indicates how risky a borrower you are from a lender’s perspective.

Score ranges break down as follows:

  • Excellent credit: 750+
  • Good credit: 700-749
  • Fair credit: 650-699
  • Poor credit: 600-649
  • Bad credit: below 600

A higher credit score—roughly 700 or above—can result in your getting approved for better terms and conditions. For example, your credit reports and/or scores impact the deals and interest rate you get when you buy a home, finance a car, rent an apartment, apply for a job, buy insurance, purchase a cell phone or open a new credit card.

The best way to improve your credit score or maintain it is to be responsible with the credit cards and loans you have. Remember those five factors mentioned a minute ago? This is where they come into play—things like making loan and credit card payments on time each month and maintaining a good debt usage or a credit utilization rate—the amount of debt, including credit card debt, you have in relation to your overall credit limit—can help you reach the credit score you’re after.

Using credit irresponsibly by making late payments and maxing out credit limits can have an affect your credit negatively and lower your credit score.

How Does Credit Reporting Work?

The credit reporting system includes three main players:

  • Consumers
  • Credit bureaus
  • Financial companies, such as banks, lenders and credit card issuers

Information about your credit cards, loan accounts and credit inquiries is reported electronically to the three main national credit bureaus—TransUnion, Equifax and Experian—by lenders and creditors roughly every 30 days. The bureaus collect and store your credit information in your credit file for future reference. Meaning, your behaviors can be reviewed in the future by others to determine your risk level.

Businesses, such as auto loan lenders, banks, credit unions, credit card companies and insurance agencies—even employers—use your credit data from the credit bureaus to determine your risk level. Once they have an idea of how risky it is to lend you money, they determine the rates you have to pay or other terms and conditions. Or, they may determine not to loan you money or give you a credit card at all. They may also use this information to send you pre-approved offers in the mail.

The three national credit reporting agencies don’t share information with each other and not all lenders or creditors report to each. As such, your credit reports from TransUnion, Equifax and Experian can contain different information about you. So, it’s important to monitor all three reports because you can never be sure which one will be used when you apply for a new account. You also want to make sure you review them for any errors that are damaging your scores. Learn more about how to dispute an error on your credit reports.

Are Creditors Required to Report to Credit Bureaus?

Not all creditors report your account information to the credit bureaus. And they’re not required to. While businesses are legally required to report accurate information, there’s no law that says they have to report at all. While nearly every major creditor reports to all three bureaus, smaller lenders and banks may not send your monthly account information to all three or any of the credit bureaus.

What’s On Credit Reports?

Along with your credit card and loan account records, basic information about you, like your name, address and recent applications, is recorded in your credit files. Public records such as bankruptcies, tax liens and judgments can also appear on your reports.

Information about your income, race, gender, age, religion or health details isn’t included on credit reports.

Most information expires from your credit reports after 7 to 10 years, but when information expires can vary depending on the circumstance. It’s important to keep the information on your credit reports positive and accurate. And if there’s something inaccurate on your credit reports, you can file a dispute with one or more of the credit reporting bureaus to try and have it removed from your file.

Find Out Where You Stand

Finding out how credit works is important. And now that you’ve done that, you likely want to know where you stand. You can get your free Experian credit score and a free credit report card on

Your report card includes including a grade for each area that makes up your scores. You see how your payment history, debt and other factors affect your scores, and get recommendations for ways to improve each area if needed.

Your report card is updated every two weeks, so you can check your credit regularly and ensure nothing unexpected pops up. An unexpected change in your score can indicate an issue, such as potential identity theft.

How do credit scores work? Get your free credit report card and find out.