Credit score

What is a credit score?

A credit score is a three-digit number used by lenders to assess your creditworthiness. Credit scores let lenders and creditors know how risky you are as a borrower, indicating your ability to pay your bills on time. This number guides their lending decisions on credit limits, loan terms, and interest rates.

How do credit scores work?

Credit scoring models analyze credit reports from the three major credit monitoring agencies and assign a score to the consumer based on this data.

There are different credit scoring systems available, and each lender will favor one over the other. Some are general purpose, while others are tailored to specific lending industries like mortgages and autos.

The most used are FICO (Fair Isaac Corporation) and VantageScore 3.0.

Both FICOand VantageScore providing free credit scores and tools that help identify bad credit and create personal finance plans.

How are credit scores calculated?

Each score is based on information collected by the major credit bureaus: Experian, Equifax and TransUnion. These credit reporting agencies collect data from credit card companies, financial institutions, and lenders to create a report.

Credit scoring models analyze credit report information and assign a value to each factor. Depending on the model, some factors will have a big influence while others only represent a small percentage of your overall score. Therefore, different scoring models will produce different credit scores, even if they refer to the same credit report.

Difference Between Credit Scores and Credit Reports

Your credit score is not the same as your credit report. Credit reporting companies use information from your credit report to determine your credit score.

A credit report documents your credit and payment history. It is the information in your credit report that determines your creditworthiness and, therefore, your score. Anyone can get their free credit report from Annual credit report ( or directly from one of the credit bureaus.

It’s important to check your own credit report regularly to spot items that could cause long-term damage to your credit. Lenders look at one of three credit reports, so make sure the information is correct and matches all agencies.

Factors that make up your credit score

  1. Payment history: Paying on time improves credit scores, while too many late payments are considered a higher risk.
  2. Total amount of debt: Any large debt is considered a higher risk, whether it’s a mortgage, car loan, student loan, personal loan, or credit card debt.
  3. Length of credit history: The longer your history of accounts in good standing, the better your credit score.
  4. New credit accounts: Having too many new accounts can be seen as a sign of credit risk.
  5. Different types of credit: Having different accounts, like a credit card and a loan, is known as having a “credit mix” and tends to improve your credit score.
  6. Credit utilization rate: Using more than 30% of your available credit lines makes you feel unreliable. Therefore, any usage over 30% will hurt your credit score.

What constitutes a good credit score?

The most common credit score ranges from 300 to 850 points. VantageScores considers 660-700 to be a good score, while FICO is between 670 and 739. Scores above 800 are “excellent” or “outstanding” in both models – the highest level possible.

A higher credit rating increases your chances of getting approved for a loan. This “creditworthiness” helps determine how much you can borrow when applying for a mortgage and other types of financing, such as car loans, personal loans. Credit scores also affect the credit limit on credit cards.

If your credit score indicates that you are well equipped to repay, lenders may offer you a lower interest rate and you will pay less to borrow. Unfortunately, the opposite is also true.

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What can lower your credit score?

Credit scores decline due to a combination of a person’s own actions, external factors like identity theft and fraud, or any combination of these.

Here are the most common factors that affect your credit score:


A healthy credit score can drop hundreds of points after filing for bankruptcy, and the bankruptcy score stays on the report for up to 10 years.


If you are behind on your mortgage payments, the lender can foreclose on the mortgage by taking ownership of the property. Therefore, this negative rating carries a lot of weight and stays on the report for 7 years.

High use of credit

Having one or more credit cards in good standing can improve your credit score, but using more than 30% of your revolving lines of credit will lower your score. A smart decision is to carry over balances between cards so that overall usage is below the 30% threshold.

Late payments

Late payments tell lenders that you are a risk they may not be comfortable with. A single late payment can stay on your credit report for seven years.

Credit applications

Lenders examine your credit score with what is called a credit inquiry, credit check, or credit application. There are two types:

Difficult investigation Soft inquiry
Linked to a formal loan or credit application No formal loan or credit request linked to the application
Lenders use it to accept or reject your application Lenders and credit card issuers use it to pre-approve applicants
Must be allowed Potential employers and even phone companies do due diligence as part of your assessment
Stay on your report for up to two years Reviewing your own credit report counts as an informal request
Too many can lower your overall score Are only visible to you and have no impact on your score

If any of these are in error – for example, a serious unauthorized request – it is up to you to request its removal. To remove negative items from your credit report, you can dispute the items yourself or hire the services of credit repair companies.

For personalized advice to improve your overall financial situation, contact a credit counsellor. Non-profit organizations such as the National Credit Counseling Foundation (NFCC) can help you better understand your credit and improve your score over time.

Summary of Money’s Guide to Credit Scores

A credit score measures your creditworthiness and guides a creditor’s lending decisions on loan rates, terms, and amounts. Credit reporting companies use data from your credit report – a detailed record of your borrowing history and behaviors – to calculate your credit score. A healthy credit rating is based on good borrowing practices: on-time payments, moderate amount of debt and low credit utilization.

You need a good credit rating to qualify for better loan terms and better interest rates. A bad credit score doesn’t stop you from borrowing money, but it’s a big obstacle when applying for a mortgage or car loan. Poor credit limits your lender options, raises your interest rates, and may even disqualify your loan application.