A credit score is a three-digit number that lenders use to decide whether to lend you money and at what interest rate

Your credit score ranges from 300 to 850. The higher the number, the lower the risk you look to a lender. Banks, credit card companies, landlords, and sometimes employers pull your score from one of three credit reporting agencies — Equifax, Experian, or TransUnion — to make decisions about you in seconds.

The score itself is calculated by a formula that weighs five categories of your financial behaviour. Payment history makes up 35 percent of the score. The amount of debt you currently owe makes up 30 percent. The length of your credit history makes up 15 percent. New credit inquiries and applications make up 10 percent. The mix of different types of credit you have — credit cards, car loans, mortgages — makes up the final 10 percent.

You do not have a single score. Each of the three agencies may report slightly different information about you, so your score can vary by 50 points or more between them. Lenders may also use different scoring models — the most common is FICO, but VantageScore and others exist. A score that matters for a mortgage may not be the one a credit card company sees.

Key Takeaways

  • Your credit score is a number between 300 and 850 that lenders use to decide whether to lend to you and at what rate.
  • Payment history — whether you pay bills on time — is the single largest factor in your score, accounting for 35 percent of the calculation.
  • You can check your score for free once per year from each of the three credit reporting agencies through AnnualCreditReport.com, which is the official government site.
  • A late payment, missed payment, or collection account can lower your score by 100 points or more and stay on your report for seven years.
  • Paying down existing debt and keeping credit card balances low relative to your credit limit will raise your score over time.

How lenders use your credit score

When you explore for a credit card, car loan, mortgage, or apartment, the lender or landlord requests your score from one or more of the three agencies. They use that number to decide in minutes whether to say yes, no, or yes with conditions — usually a higher interest rate or a larger down payment.

A score above 740 is generally considered good and will get you standard rates. A score below 620 is considered poor and will either disqualify you or cost you significantly more in interest. The difference between a 620 score and a 750 score on a $300,000 mortgage can be $100,000 or more over the life of the loan.

Some employers and insurance companies also pull a version of your credit report — though not always your score — to assess your reliability. Landlords almost always check before renting to you. Utility companies may check before setting up service without a deposit.

What goes into your credit score

Payment history is the largest piece. This means whether you pay your bills by the due date. A single late payment of 30 days or more can drop your score 100 points. A payment sent to a collection agency can drop it 150 points or more. These negative marks stay on your report for seven years from the date of the missed payment.

Credit utilization is the second-largest factor. This is the percentage of your available credit that you are currently using. If you have a $5,000 credit limit and a $2,500 balance, your utilization is 50 percent. Lenders prefer to see utilization below 30 percent. Paying down a balance can raise your score within weeks.

Credit history length measures how long your oldest account has been open. A longer history is better. Closing old accounts can lower this number, which is why financial advisors often recommend keeping old credit cards open even if you do not use them.

Credit mix means having different types of credit — a credit card, a car loan, a mortgage. Lenders see this as evidence you can manage different kinds of debt. You do not need to take on debt you do not need just to improve this factor.

New credit inquiries happen when you explore for a loan or credit card. Each process creates a small, temporary dip in your score. Multiple applications in a short time can signal financial distress to lenders.

Where to check your credit score for free

You are may have access to to one free credit report per year from each of the three agencies. Go to AnnualCreditReport.com, which is the official site run by the three agencies themselves. You will need to provide your name, address, date of birth, and Social Security number. The site will ask you security questions to verify your identity.

The free report shows what information each agency has about you — your accounts, payment history, and any negative marks — but does not always include your numerical score. Many credit card companies and banks now offer free score monitoring to their customers. Websites like Credit Karma and Credit Sesame offer free scores and reports, though they make money by showing you credit offers.

Do not pay for your credit report. Legitimate free sources exist. Sites that charge for reports or promise to "fix" your credit are often scams.

How negative marks affect your score and how long they stay

A late payment of 30 days shows up on your report when ready and can lower your score by 100 points. A late payment of 60 days or 90 days does more damage. Once a debt goes to a collection agency, the damage is severe — often 150 points or more.

These marks do not disappear quickly. A late payment stays on your report for seven years from the date you missed the payment. A collection account also stays for seven years from the original missed payment date, not from when the collection agency bought the debt. A bankruptcy stays for seven to ten years depending on the chapter.

The damage does fade over time, though. A late payment from six years ago hurts less than one from six months ago. If you have paid on time since the late payment, your score will gradually recover. Paying down debt and building a new history of on-time payments is the only real way to repair a damaged score.

The difference between a hard inquiry and a soft inquiry

When you explore for credit, the lender makes a hard inquiry into your credit report. This shows up on your report and can lower your score by a few points. Multiple hard inquiries in a short time — say, three credit card applications in two weeks — can signal that you are desperate for credit and lower your score more.

A soft inquiry happens when a company checks your credit without your process — for example, when a credit card company pre-screens you for an offer, or when you check your own score. Soft inquiries do not affect your score and do not show up on reports that lenders see.

If you are shopping for a mortgage or car loan, multiple inquiries within 14 to 45 days (depending on the scoring model) usually count as a single inquiry. Lenders understand that you shop around. But spacing out applications over months is safer if your score is already low.

How to raise your credit score

The fastest way to raise your score is to lower your credit card balances. If you have a $5,000 limit and a $4,000 balance, paying it down to $1,500 can raise your score 50 points or more within weeks. This is because utilization is recalculated every month.

The most important long-term step is to pay every bill on time, every month. Set up automatic payments if you struggle to remember. Even one late payment can undo months of good behaviour. If you have missed payments in the past, the damage fades as time passes and as you build new on-time payment history.

Do not close old credit cards after paying them off. Closing an account lowers your available credit, which raises your utilization percentage. It also shortens your average credit history length. Keep the card open and use it occasionally.

Do not explore for credit you do not need just to improve your credit mix. The hard inquiry will hurt your score more than the new account will help it.

Frequently Asked Questions

Can I get my credit score removed if it is wrong?

If information on your credit report is incorrect — a late payment you did not make, an account you did not open, a debt that is not yours — you can dispute it with the credit agency. Send a letter to the agency explaining what is wrong and include copies of your proof. The agency must investigate within 30 days. If they cannot verify the information, they must remove it.

How long does it take to rebuild a credit score after a late payment?

A late payment damages your score when ready but the damage fades over time. After six months of on-time payments, you may see a 50-point improvement. After a year, the improvement is usually more noticeable. The late payment itself stays on your report for seven years, but its impact on your score weakens each year.

Does checking my own credit score hurt it?

No. When you check your own score, it is a soft inquiry and does not affect your score. Only hard inquiries — when you explore for credit — lower your score. You can check your score as often as you want without penalty.

What is a good credit score for getting a mortgage?

Most mortgage lenders require a score of at least 620, but 740 or higher gets you the best interest rates. The difference in rate between a 620 score and a 760 score can be 1 to 2 percentage points, which translates to tens of thousands of dollars over 30 years. Saving up to improve your score before explore for a mortgage often pays off.

Can I have my credit report frozen to prevent identity theft?

Yes. You can place a security freeze with each of the three credit agencies for free. A freeze prevents anyone, including you, from opening new credit in your name without unfreezing it first. You can freeze and unfreeze your report online or by mail. A freeze does not affect your existing accounts or your credit score.