Table of Contents
Infographic: Credit Scores Explained – What Every Beginner Should Know
Credit Scores Explained: 5 Factors That Affect Your Score
Your credit score and credit report affect everything, from being able to rent a home to saving tens of thousands in interest.
But understanding them doesn’t have to be complicated.
I passed the CFP® exam at 16 and have helped millions improve their finances over the past 8 years. I’ll share exactly what they are without the jargon, the five factors that affect your credit score, and how to improve it.
Books by Easy Peasy Finance
[This is an affiliate link: at no additional cost to you, we will earn a commission if you click & make a purchase]
What Is a Credit Score?
A credit score is a number usually between 300 and 850 that lenders and landlords use to judge how risky it would be to lend you money and how likely you are to make regular payments on time.
It’s one of the most important factors in deciding whether you’re approved and how much interest you pay.
Your credit score is calculated from your credit report, which includes details on your credit cards and loans, including how much you owe right now, your payment history, credit limits, collections, and more.
There are three major credit bureaus, which are Equifax, Experian, and TransUnion – and they each create their own credit report.
What Affects Your Credit Score?
The most commonly used credit score is the FICO Score, which is made up of five factors.
The 2 most important ones are payment history, which makes up 35% of your score, and amounts owed, which is 30%.
Payment history tracks how often you make credit card and loan payments on time.
And amounts owed measures your credit utilization, which is how much of your available credit card limits you have used, expressed as a percentage.
So if you have 3 cards with a $5,000 limit each, and you spent a total of $7,500, you’d have a 50% utilization.
Generally, the lower this number is the better, and keeping it below 30% is a good target for beginners.
Here are the other categories.
- Length of credit history, which is how long you’ve had credit cards or loans for, accounts for 15%
- New credit, which tracks whether you’ve recently applied for or opened new loans or credit cards, is about 10%
- Credit mix, which looks at whether you’ve successfully managed different types of credit, like a credit card, a mortgage, or an auto loan, is also about 10%
But what credit score should you aim for?
What Is a Good Credit Score to Aim For?
A FICO Score below 580 is considered poor, and one between 800 and 850 is exceptional.
While you’re starting out, 700 is a good initial target. But over time, try to reach around 760 since increasing your score above this is a lot more difficult, and it has a much smaller added benefit.
But your score can be slightly different based on which of the 3 credit bureaus’ information is being used, the exact scoring model, and even what type of loan you’re applying for.
So reaching a 700 or 760 doesn’t guarantee that you’ve crossed a universal cutoff, but it does put you in a strong overall range.
But how exactly do you reach that score?
Check this out to find out 5 strategies to improve your credit score fast, including some that are so counterintuitive you might never think of them otherwise. Check it out to save tens of thousands on loans: 800+ Credit Score: Genius Hacks to Improve Your Score FAST