What a credit score actually is

A credit score is a three-digit number that lenders use to decide whether to lend you money and what interest rate to charge. It is built from your borrowing and payment history — specifically, whether you borrowed money before, how much you owed, and whether you paid it back on time. The score itself ranges from 300 to 850 on most scales used in the United States.

The score is not a measure of how much money you have or how stable your job is. It is purely a record of how you have handled debt in the past. If you have never borrowed money, you have no credit score at all — you are not penalized for that, but lenders have no history to look at, which can make it harder to borrow for the first time.

Three companies — Equifax, Experian, and TransUnion — collect and maintain most of the information that goes into your score. These are called credit bureaus. They do not create the score themselves; they hold the data, and lenders calculate the score using that data. Different lenders may see slightly different scores because they use different scoring models or because the bureaus have not yet updated their records in sync.

Key Takeaways

  • Your credit score comes from five categories of information: payment history (35 percent), amounts owed (30 percent), length of credit history (15 percent), credit mix (10 percent), and recent inquiries (10 percent).
  • Late payments, high balances, and collections accounts all lower your score, but the damage fades over time — a seven-year-old late payment hurts less than a recent one.
  • You can see your credit report for free once per year from each bureau at annualcreditreport.com, and you should check it for errors before applying for a loan.
  • Closing old credit accounts can lower your score even if you pay them off, because it reduces the total credit available to you and shortens your average account age.
  • Building credit takes time; the fastest way is to use a secured credit card or become an authorized user on someone else's account, both of which create a payment history within months.

The five things that make up your score

Payment history is the largest piece — 35 percent of your score. This is whether you paid your bills on time. A single late payment can drop your score by 50 to 100 points depending on how late it was and how good your score was before. Payments 30 days late hurt more than payments a few days late. Accounts sent to collections or charged off hurt the most.

Amounts owed is 30 percent. This is how much debt you currently carry compared to your credit limits. If you have a credit card with a $1,000 limit and a $900 balance, you are using 90 percent of that limit, which hurts your score. If you have the same card with a $100 balance, you are using 10 percent, which helps it. The bureaus look at this ratio for each account and also for all accounts combined. Most scoring models reward you for using less than 30 percent of your total available credit.

Length of credit history is 15 percent. This is how long you have had credit accounts open. Older accounts help your score more than new ones. This is why closing an old credit card can hurt you even if you paid it off — you lose the age of that account. If you have no credit history at all, you start at zero and build it by opening accounts and using them responsibly.

Credit mix is 10 percent. This is whether you have different types of debt — credit cards, car loans, mortgages, student loans. Lenders like to see that you can handle more than one kind of borrowing. You do not need every type to have a good score, but having only credit cards and no installment loans (like a car loan) can slightly lower your score compared to someone with both.

Recent inquiries is 10 percent. When you apply for credit, the lender checks your report, and that check shows up as a hard inquiry. Multiple hard inquiries in a short time can lower your score a little. However, checking your own report does not count as an inquiry and does not hurt your score. Shopping for a car or mortgage within 14 to 45 days (depending on the scoring model) usually counts as one inquiry, not multiple, because the bureaus know you are rate shopping.

How negative information affects your score over time

Negative marks do not stay on your report forever, and their impact gets weaker as they age. A late payment from last month hurts much more than a late payment from five years ago. After seven years, most negative information falls off your credit report entirely and stops affecting your score.

Collections accounts, charge-offs, and foreclosures also age off after seven years, though the damage they do to your score is heaviest in the first two years. A bankruptcy stays on your report for seven to ten years depending on the type. Even after negative information falls off, the fact that it happened is part of your financial history — lenders may still see it if they ask you directly or if they use older records.

The key point is that your score is not permanent. If you have had late payments or other problems, your score will improve as you make on-time payments going forward and as negative marks age. Someone who had a bad score two years ago can have a good score now if they have paid everything on time since then.

Where to see your own credit report and score

You are may have access to to one free credit report per year from each of the three bureaus. You can get all three at once or spread them out. Go to annualcreditreport.com — this is the official site run by the three bureaus. Do not use other sites that claim to offer free reports; many of them sign you up for paid monitoring services.

The free report shows you what information the bureau has on file but does not include your credit score itself. To see your actual score, you can use free tools offered by many banks and credit card companies, or you can pay for a score from the bureaus directly. The score you see from your bank may be slightly different from the score a lender sees because different lenders use different scoring models.

When you get your report, look for errors — wrong accounts, payments marked late that you made on time, accounts that are not yours. If you find an error, you can dispute it with the bureau in writing. The bureau has 30 days to investigate and correct it or explain why the information is accurate.

How to build credit if you have none or very little

If you have never borrowed money, you have no credit score. The fastest way to build one is to open a secured credit card. You put down a cash deposit (usually $200 to $2,500), and the card company gives you a credit line equal to that deposit. You use the card like a normal credit card, pay the bill on time each month, and after six to twelve months of on-time payments, the card company may convert it to a regular card and return your deposit.

Another option is to become an authorized user on someone else's credit card account — usually a family member or close friend with good credit. You do not need to use the card or pay the bill; the account holder does. As long as the account is in good standing, it can help build your score because the account's history shows up on your report. This works faster than a secured card but depends on someone else's account staying in good standing.

A third option is a credit-builder loan from a credit union or community bank. You borrow a small amount (usually $500 to $1,000), and the lender holds the money in a savings account while you make monthly payments. After you pay it off, you get the money back. The payments show up on your credit report and build your history.

What does not affect your credit score

Your credit score does not include your income, employment history, savings account balance, or whether you own a home. It does not include utility bills, rent payments, or insurance payments — those do not show up on your credit report unless they go to collections. It does not include your age, race, gender, or marital status.

Checking your own credit report or score does not hurt your score. Soft inquiries — checks done by companies offering you credit or by employers running a background check — do not show up on your report and do not affect your score. Only hard inquiries (when you apply for credit) count.

Frequently Asked Questions

How long does it take to build a credit score from scratch?

You need at least one account with at least six months of history for most scoring models to generate a score. A secured credit card or authorized user status can get you there in six months. After that, your score will continue to improve as you make on-time payments and keep balances low, but reaching a good score (670 or higher) usually takes one to two years of clean payment history.

Can I improve my score by paying off old debt?

Paying off current debt helps your score immediately because it lowers the amount you owe. Paying off old debt that is already on your report (like an old collection account) does not raise your score much, but it stops the damage from getting worse. The account will still show on your report, but it will show as paid, which is better than unpaid.

Does closing a credit card hurt my score?

Yes, usually. Closing a card reduces your total available credit, which can raise your credit utilization ratio and lower your score. It also removes the account's age from your average, which can hurt if it was an old account. If you want to close a card, pay off the balance first and wait a few months after opening new accounts so your score has time to recover.

What is a good credit score?

Scores above 670 are generally considered good, and scores above 740 are considered very good. Scores above 800 are excellent. However, different lenders have different standards — some will lend to people with scores in the 600s, while others require 700 or higher. The higher your score, the lower the interest rate you will be offered.

How often does my credit score change?

Your score can change every time the bureaus update your report, which happens when lenders report new information — usually once a month per account. If you make a payment, open a new account, or have a late payment reported, your score can shift within days or weeks. Checking your score frequently will show you these changes, but checking does not hurt your score.