In the United States, your credit score is a numerical representation of your creditworthiness, and it is used by lenders and others to assess the likelihood of you honoring your financial obligations, e.g. when it comes to repaying borrowed money, paying rent, and similar.

The credit score is based on a person’s credit history, including factors like how much debt they have, their payment history, the length of their credit history, and the types of credit they use. In the United States, your credit score play a crucial role in determining whether you qualify for loans, credit cards, mortgages, and even rental agreements. It can also significantly impact which conditions you are offered, e.g. the interest rate on your mortgage loan.

The most common credit scoring model used in the U.S. is the FICO score, although other models like VantageScore are also widely used. Most credit score models range from a minimum of 300 to a maximum of 850, with a higher score indicating better creditworthiness than a lower one.

How a Credit Score Works in the United States

In the United States, your credit score is calculated based on data from your credit report, which contains details of your credit accounts and payment history. Here’s how the key components break down for the FICO score and certain other similar credit scores.

1. Payment History (35%): This is the most significant factor in determining your credit score. It essentially reflects whether you pay your bills on time. Late or missed payments, collections, and bankruptcies will negatively impact your score.
2. Amounts Owed (30%): This measures how much of your available credit you’re using, also known as credit utilization. A high credit utilization ratio (using a large portion of your available credit) can negatively affect your score. It’s generally recommended to keep credit utilization below 30%.
3. Length of Credit History (15%): This factor considers how long you’ve had credit accounts open. A longer credit history generally improves your score, as it shows lenders that you have experience managing credit. Therefore, it can be useful to (responsibly!) start using credit as soon as you are able, since this will help build your credit history. There are forms of credit, e.g. credit cards, that you can utilize in a conservative manner and pay off in full each time the bill comes. This way, you can build credit history without wasting money on interest payments or taking on longer-term debt. You want to show prospective lenders that you, when given the opportunity to use credit, will use it in a responsible way.
4. Credit Mix (10%): Having a mix of different types of credit (such as credit cards, mortgages, and installment loans) can have a positive impact on your score. It shows lenders that you can manage various forms of credit responsibly.
5. New Credit (10%): Opening several new credit accounts in a short period can negatively impact your score, as it might indicate financial instability. Each time you apply for new credit, a hard inquiry is made on your credit report, which can lower your score temporarily.

Credit Score Ranges

Credit scores generally fall into the following categories:

• Excellent (800-850): You’re considered a very low-risk borrower and can usually qualify for the best interest rates and loan terms.
• Very Good (740-799): You’re seen as a low-risk borrower and should have little trouble qualifying for credit with favorable terms.
• Good (670-739): You have a good credit score, and most lenders will offer you credit, though you might not get the best rates.
• Fair (580-669): You may qualify for credit, but at higher interest rates. Lenders may see you as a moderate risk.
• Poor (300-579): You’re considered a high-risk borrower, and you may have difficulty qualifying for credit. If approved, expect a lower amount, high interest rates and less favorable terms.

Why is Your Credit Score Important?

It might be tempting to not care about carefully building up your credit score over time if you have no plans to apply for a mortage loan or other big loan in the future, but your credit score can actually impact many other parts of your life. Therefore, it is a good idea to start building credit history and push up your credit score, step by step, even if you have no plans to apply for a house loan, car loan, or similar. Your credit score can for instance impact your ability to get certain jobs, to rent a home or other property, and to get beneficial insurace conditions.

Your credit score can affect many aspects of your financial life. Here are a few examples:

1. Loan Approval: Lenders use your credit score to decide whether to approve you for a credit card, unsecured loan, or mortgage loan. A higher credit score increases the likelihood of approval.
2. Interest Rates: Your credit score often determines the interest rate you’ll receive on loans, credit cards, and similar. A higher score can get you lower interest rates, saving you money over time.
3. Renting Property: Landlords often check credit scores before renting out property. A higher score may increase your chances of getting approved for a lease.
4. Employment: Some employers may check your credit report as part of their hiring process, especially for jobs that involve handling finances or sensitive information. A low credit score may be interpreted as you being in a problematic situaiton financially, and employers may fear that it would make you more tempted to embezzel money or be pushed to divulge sensitive information. Even if it is not true, a low credit score can also be interpreted as you not being well organized.
5. Insurance Premiums: Insurers can use credit scores to determine the rates for insurance, e.g. car insurance and homeowners insurance, and a low credit score can result in higher premiums. Therefore, even if you plan on paying your car or home with cash, the lack of a high credit score can cost you.

How to Improve Your Credit Score

Your credit score is an essential financial tool that impacts your ability to borrow money, the interest rates you pay, and your financial reputation. By understanding how it’s calculated and taking steps to improve it, you can gain better access to credit and save money in the long run. Maintaining good financial habits will help ensure that your score remains in good standing.

If you want to boost your credit score, consider these tips:

Pay Bills on Time

Since payment history is the largest factor in your credit score, make sure you pay all bills by their due dates. Even one late payment can negatively affect your score.

Contact Your Creditors Right Away

If you are in a pinch and suspect you might not be able to pay a bill on time, deal with it right away by contacting the creditor. As long as it does not become a pattern, the creditor may be willing to give you more time to repay the bill, or even provide your with a step-by-step repayment plan. Some credit cards have grace periods that you can utilize. Biting the bullet and trying to resolve the situation is better than just having the bill go to collection and harm your credit score.

Reduce Credit Utilization
Try to keep your credit card balances low relative to your credit limit. Aim for using less than 30% of your available credit.

Keep Accounts Open
The longer your credit history, the better. Avoid closing old accounts, even if you’re not using them, as it can shorten the average age of your credit accounts. Of course, loans and available credit that are costing you interest or fees is another thing, and you need to evaluate what is best in your situation.

Limit Hard Inquiries
Each time you apply for new credit, a hard inquiry is added to your credit report. Too many hard inquiries in a short period can lower your score, at least short term. Be selective about applying for new credit and do not apply for a lot of different credit at the same time. It is important to remember that the hard inquiries can damage your score even if you do not actually end up using the credits you applied for.

Diversify Your Credit Mix
If you have only credit cards, consider adding a different type of credit, like an installment loan, to show lenders that you can manage different types of credit.

Check Your Credit Report for Errors
Regularly review your credit report for any inaccuracies, such as accounts you don’t recognize or incorrect balances. You can dispute errors with the credit bureaus to have them corrected.

How Can I Check My Credit Score?

In the U.S., you’re entitled to a free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once a year via AnnualCreditReport.com. Several online platforms and credit card companies also offer free credit score monitoring.

It is important to only use reputable services, as some scammers are operating in this field.