What a credit score is and why lenders look at it

A credit score is a three-digit number that summarizes your history of borrowing and repaying money. Lenders use it to decide whether to lend you money, how much interest to charge, and what terms to offer. The higher your score, the lower the risk you appear to be — and the better the rates you'll get on mortgages, car loans, and credit cards.

Your score comes from data in your credit report: whether you paid bills on time, how much debt you're carrying, how long you've had credit accounts open, and how often you've applied for new credit. Three major companies — Equifax, Experian, and TransUnion — collect this information and calculate scores using different formulas. The most common formula is the FICO score, which ranges from 300 to 850.

For homebuying specifically, your credit score often determines whether you get approved for a mortgage at all. Most lenders require a minimum score of 580 to 620, though better rates typically start at 740 or higher. A single point difference can mean thousands of dollars in interest over the life of a 30-year loan.

Key Takeaways

  • Your credit score is built from payment history (35%), amounts owed (30%), length of credit history (15%), credit mix (10%), and new credit inquiries (10%).
  • You can request a free credit report once per year from each of the three bureaus at annualcreditreport.com, and checking it won't lower your score.
  • Paying bills on time and keeping credit card balances below 30% of your limit are the fastest ways to improve a low score.
  • Errors on your credit report are common and can be disputed directly with the bureau that reported them.

The five factors that make up your score

Payment history (35% of your score) is the single largest factor. This includes whether you paid credit cards, loans, and bills on time. A single late payment can drop your score by 100 points or more, and the damage lasts longer the more recent it is. Payments 30 days late hurt more than payments 90 days late in terms of how much damage they do, but both stay on your report for seven years.

Amounts owed (30% of your score) looks at how much debt you're carrying relative to your credit limits. If you have a credit card with a $5,000 limit and a $4,500 balance, that's a 90% utilization rate — very high. Lenders see this as a sign you're stretched thin. Keeping balances below 30% of your limit signals you can manage credit responsibly. This factor includes all types of debt: credit cards, car loans, student loans, and mortgages.

Length of credit history (15% of your score) rewards you for having accounts open for a long time. Closing old credit cards actually hurts this factor, even if you're not using them. The oldest account on your report contributes to your average account age, and a longer average age makes your score higher.

Credit mix (10% of your score) means having different types of credit — revolving credit like credit cards and installment credit like car loans or mortgages. Lenders want to see you can handle both. New credit inquiries (10% of your score) track how often you've applied for new credit recently. Each application creates a "hard inquiry" that lowers your score slightly. Multiple inquiries in a short time signal financial desperation to lenders.

How to check your credit report and spot errors

You're may have access to to one free credit report per year from each of the three bureaus. Go to annualcreditreport.com — this is the official site run by the three companies and required by federal law. You can request reports from all three at once or stagger them throughout the year. Checking your own report does not lower your score; only applications for new credit do.

When you get your report, look for accounts you don't recognize, late payments you know you made on time, and duplicate entries. Errors are surprisingly common — a study by the Federal Trade Commission found that about one in five people have an error on at least one of their three reports. If you find a mistake, contact the bureau that reported it in writing (email or certified mail) and explain the error. Include copies of proof, like a bank statement or payment confirmation. The bureau must investigate within 30 days and remove the error if it can't verify it.

You can also place a fraud alert or credit freeze on your report if you're concerned about identity theft. A fraud alert tells lenders to verify your identity before opening new accounts. A credit freeze blocks access to your report entirely, which stops new accounts from being opened in your name but also stops you from applying for credit until you lift it. Both are free.

Steps to improve a low credit score

If your score is below 620, the fastest improvements come from fixing payment history and lowering credit card balances. Start by making every payment on time, even if it's just the minimum. Set up automatic payments if you struggle to remember due dates. One on-time payment won't fix a low score, but consistent on-time payments over several months will begin to raise it.

Next, pay down credit card balances. If you have $3,000 in credit card debt spread across three cards with $5,000 limits each, your utilization is 20% — good. But if all $3,000 is on one card, that card's utilization is 60% — bad for your score even though your total debt is the same. Paying down the highest-balance card first lowers your overall utilization fastest. Even small payments help; going from 90% utilization to 50% can raise your score by 50 points or more.

Don't close old credit cards after paying them off. Closing them removes available credit from your utilization calculation and shortens your average account age. Instead, keep them open and use them occasionally for small purchases you pay off immediately. This keeps the accounts active without raising your utilization.

Avoid applying for new credit while you're trying to rebuild. Each application creates a hard inquiry that lowers your score by a few points. Multiple inquiries in a short time can drop your score by 10 to 50 points. If you need credit, space out applications by at least six months.

Credit scores and mortgage approval

Most conventional mortgage lenders require a minimum credit score of 620, though some require 640 or higher. FHA loans, which are backed by the federal government, often accept scores as low as 580. VA loans and USDA loans have their own minimums, usually around 580 to 620, though individual lenders may require higher scores.

The difference between a 620 score and a 740 score can be 1 to 2 percentage points in interest rate. On a $300,000 mortgage, that's a difference of $150 to $300 per month — or $54,000 to $108,000 over 30 years. If your score is below 740, waiting three to six months to improve it before applying for a mortgage can save you tens of thousands of dollars.

When you apply for a mortgage, the lender will pull your credit report and score. This creates a hard inquiry, but mortgage inquiries are treated differently than credit card or auto loan inquiries — multiple mortgage inquiries within 14 to 45 days (depending on the scoring model) count as a single inquiry. This means you can shop around with different lenders without tanking your score.

What happens after you get a mortgage

Your credit score doesn't stop mattering once you're approved. During the underwriting process, some lenders pull your credit again a few days before closing to make sure nothing has changed. If you've opened new credit accounts, missed a payment, or significantly increased your debt, the lender can withdraw the offer. Don't make major financial moves between approval and closing.

After you close, your mortgage becomes part of your credit history. Making on-time payments builds your score over time. A mortgage is installment credit, which is weighted differently than revolving credit like credit cards. Having a mortgage and maintaining good payment history can actually raise your score, even if you're carrying a large balance.

Frequently Asked Questions

How long does it take to improve a credit score?

Small improvements can appear within 30 to 60 days of paying down balances or making on-time payments. Larger improvements typically take three to six months of consistent good behavior. Negative items like late payments stay on your report for seven years but hurt your score less as time passes.

Does checking my credit score lower it?

No. Checking your own credit report or score is a "soft inquiry" and doesn't affect your score. Only applications for new credit create "hard inquiries" that lower your score. You can check your score as often as you want without penalty.

What's the difference between a credit score and a credit report?

A credit report is the detailed record of your borrowing and payment history. A credit score is a number calculated from that report. Your report contains the raw data; your score is the summary lenders use to make decisions.

Can I remove negative items from my credit report?

You can dispute errors, and the bureau must remove them if they can't verify them. But accurate negative items like late payments stay on your report for seven years. They hurt your score less as time passes, and you can't force their removal before that time is up.

Do I need to pay a company to improve my credit score?

No. Credit repair companies charge hundreds or thousands of dollars to do things you can do yourself for free — dispute errors and pay down debt. Be wary of companies that promise to remove accurate negative items or may provide score improvements.