How Credit Scores Work

A credit score is a three-digit number, generally ranging from about 300 to 850, that summarizes information from your credit history into a single figure. Lenders, landlords, and sometimes insurers use it as one signal, among others, when deciding whether to extend credit and on what terms.

The score is calculated from data in your credit reports, which are maintained by credit reporting agencies. Different scoring models exist, and the exact number can vary slightly depending on which model and which agency's data is used, but the underlying factors tend to be similar across models.

While exact formulas are proprietary, most widely used credit scoring models rely on a similar set of broad categories. Payment history and amounts owed tend to carry the most weight, followed by length of credit history, credit mix, and new credit inquiries.

Credit utilization is the percentage of your available revolving credit, mainly credit cards, that you are currently using. For example, if you have a single credit card with a $2,000 limit and a $600 balance, your utilization on that card is 30%.

Lower utilization is generally viewed more favorably. Someone using $200 of a $2,000 limit (10% utilization) is often viewed differently than someone using $1,800 of that same limit (90% utilization), even if both eventually pay their balance in full each month, because scores are often calculated using the balance reported at a specific point in time, not necessarily the balance after payment.

Credit card issuers typically report your balance to credit reporting agencies once per billing cycle, often on your statement closing date, which may not be the same as your payment due date. This means the balance used in utilization calculations might be a snapshot from a specific day, not your balance right before the due date.

This is a common source of confusion: someone can pay their card in full every month and still see a reported balance above zero, because the report was generated before the payment posted. Understanding this timing can help explain fluctuations in a score from month to month.

For people building credit for the first time, options often include becoming an authorized user on another person's account, applying for a secured credit card that requires a cash deposit, or using a credit-builder loan offered by some banks and credit unions.

Once accounts are open, the habits that tend to support a score over time include paying at least the minimum amount due on or before the due date every cycle, keeping balances low relative to limits, and avoiding opening many new accounts in a short period.

A frequent mistake is closing older credit cards once they are paid off. Closing an account can shorten your average account age over time and can also reduce your total available credit, which may raise your utilization percentage even if your spending has not changed.

Another mistake is applying for several new credit products in a short window, such as multiple store cards during a shopping trip. Each hard inquiry can have a small, typically temporary effect on a score, and several inquiries close together can be viewed as a sign of higher risk by some scoring models.

Check your credit reports periodically for accuracy, since errors do happen and can be disputed with the reporting agency. Focus first on paying at least the minimum on every account by the due date, since payment history is typically the heaviest factor, then work on lowering balances relative to your limits over time.