What your credit score does

Your credit score is a three-digit number that lenders use to decide whether to lend you money and how much interest to charge. It is built from your history of borrowing and repaying — how much you owe, whether you paid on time, and how long you have been borrowing. The higher your score, the lower the interest rate you will pay on a mortgage, car loan, or credit card.

A lender pulls your credit report (a detailed record of your borrowing history) and runs it through a scoring model — usually the FICO score or VantageScore — to get a number between 300 and 850. That number determines whether you get the loan at all, and if you do, what you will pay for it. The difference between a 620 score and a 750 score can mean tens of thousands of dollars over the life of a mortgage.

Your credit score also affects things beyond loans. Landlords check it before renting to you. Employers in certain fields (finance, security) may review it. Insurance companies use credit-based insurance scores to set your premiums. Utility companies may require a deposit if your score is low. In each case, a low score signals risk to the other party, and they price or restrict your access accordingly.

Key Takeaways

  • Your credit score determines the interest rate you pay on mortgages, car loans, and credit cards — a 130-point difference can cost you $100,000 over 30 years.
  • Lenders, landlords, employers, and insurance companies all use your credit score to decide whether to work with you and on what terms.
  • Your score is built from payment history (35%), amounts owed (30%), length of credit history (15%), credit mix (10%), and new credit inquiries (10%).
  • Missing a payment by 30 days or more damages your score when ready and stays on your report for seven years.
  • You can see your credit report free once a year from each of the three bureaus at annualcreditreport.com, and you have the right to dispute errors.

How lenders use your score to set your rate

When you explore for a mortgage, auto loan, or credit card, the lender runs your credit and gets a score. They use that score to sort you into a risk tier. A borrower with a 750 score might get a mortgage at 6.5%, while a borrower with a 650 score gets 7.5% — that extra 1% costs roughly $100,000 more over 30 years on a $300,000 loan. The lender is not punishing you; they are pricing the risk that you will default.

The same logic applies to credit cards. A person with a 780 score might get a card with a 15% APR, while a person with a 620 score gets 24% or is denied outright. If you carry a balance, that higher rate compounds the debt. If you pay in full each month, the rate does not matter — but you still need the score to get approved in the first place.

Some lenders set a minimum score threshold and will not lend below it, regardless of other factors. Others use score as one input among many (income, employment history, debt-to-income ratio). But in nearly all cases, a higher score gives you access to better terms or access at all.

What makes up your credit score

Payment history (35% of your score) is the single largest factor. This is whether you paid your bills on time. A payment 30 days late damages your score. A payment 60 days late damages it more. A payment 90 days late or a default damages it severely. These late payments stay on your report for seven years, though their impact fades over time.

Amounts owed (30% of your score) is how much you currently owe relative to your credit limits. If you have a credit card with a $5,000 limit and you owe $4,500, your utilization is 90% — high utilization signals financial stress and lowers your score. Lenders prefer to see utilization below 30%. This applies to all your revolving credit (credit cards, lines of credit) combined, not just one card.

Length of credit history (15% of your score) rewards you for having accounts open a long time. Closing old accounts can lower this factor. Credit mix (10% of your score) means having different types of credit — a mortgage, a car loan, and a credit card together score better than three credit cards alone. New credit inquiries (10% of your score) penalizes you for explore for multiple new accounts in a short time, because that signals financial desperation.

How a low score affects borrowing and housing

A credit score below 620 makes borrowing expensive or impossible. Most mortgage lenders will not lend to someone with a score below 580, and those who do charge rates 2 to 3 percentage points higher. FHA loans (backed by the Federal Housing Administration) go down to 580 in some cases, but require a larger down payment. Conventional loans usually require 700 or higher.

For rental housing, a low score does not legally disqualify you, but landlords treat it as a red flag. Many run credit checks as part of the process and may deny you or require a larger security deposit, a co-signer, or prepayment of several months' rent. Some landlords will not rent to anyone below 650. If you have a low score and need to rent, be prepared to explain the reason (medical debt, job loss, past mistake) and offer proof of current income.

Auto loans are available to people with lower scores, but the rates are steep — 10% to 20% APR is common for scores below 600. A $25,000 car loan at 18% costs roughly $9,000 more in interest than the same loan at 6%. Subprime auto lenders also use GPS tracking and starter interrupt devices (which disable the car if you miss a payment), so the consequences of default are when ready.

Why employers and insurers check your score

Some employers, particularly in finance, security, and government contracting, check your credit as part of the hiring process. They are not looking for a perfect score — they are looking for signs of financial distress that might make you vulnerable to bribery or theft. A bankruptcy or multiple collections accounts can disqualify you from certain jobs. This is legal in most states, though a few states restrict it.

Insurance companies use a credit-based insurance score, which is similar to but not identical to your FICO score. They have found that people with lower credit scores file more insurance claims, so they charge higher premiums. A person with a 600 credit score might pay 50% more for auto insurance than someone with a 750 score, even if they have no accidents. This is legal in all states.

Utility companies (electric, gas, water) may check your credit before connecting service. If your score is low or you have a history of unpaid utility bills, they may require a deposit — typically $100 to $300 — before they turn on your service. Once you have paid on time for a year or two, they will usually refund it.

How to check your credit report and dispute errors

You are may have access to to one free credit report per year from each of the three major credit bureaus: Equifax, Experian, and TransUnion. Go to annualcreditreport.com (the official site run by the bureaus themselves) and request your reports. You can stagger them — one every four months — to monitor your credit throughout the year. Do not use third-party sites that claim to offer "free" reports; they often sign you up for paid monitoring services.

When you get your report, read it carefully. Look for accounts you did not open, payments marked late that you made on time, or debts that should have fallen off after seven years. If you find an error, you have the right to dispute it. Contact the bureau in writing (email or certified mail) and explain the error. The bureau must investigate within 30 days and remove the error if it cannot verify it.

You can also get your credit score free from many sources: your bank or credit card issuer often provides it, Credit Karma and Credit Sesame offer free scores, and some employers offer free credit monitoring. These free scores are usually accurate within a few points of your FICO score. Paid credit monitoring services (like LifeLock) offer fraud alerts and identity theft insurance, but they are not necessary unless you have been a victim of identity theft.

Building credit if you have little or none

If you have no credit history — you have never borrowed money or had a credit card — lenders have no data to assess your risk. You can build credit by becoming an authorized user on someone else's credit card (their payment history helps your score), opening a secured credit card (you deposit $500 and get a $500 credit limit, and the card issuer reports your payments to the bureaus), or taking out a credit-builder loan from a credit union (you borrow $500, make monthly payments, and the credit union reports the payments to the bureaus).

The key is to use credit and pay on time, every time. One missed payment can erase months of good history. If you have past damage (late payments, collections, bankruptcy), your score will recover over time — the impact fades after two to three years, and after seven years most negative items fall off your report entirely. Rebuilding takes patience, but it is possible.

Frequently Asked Questions

Does checking my own credit score hurt it?

No. When you check your own credit score or report, it is a "soft inquiry" and does not affect your score. Only "hard inquiries" — when a lender pulls your credit because you applied for a loan — count against you. You can check your score as often as you want without penalty.

How long does a late payment stay on my credit report?

A late payment stays on your report for seven years from the date it was first reported as late. After seven years, it falls off automatically. However, the impact on your score fades much faster — a late payment from five years ago hurts less than one from six months ago. Bankruptcy stays for 10 years.

Can I improve my score quickly?

No single action will raise your score quickly, but paying down credit card balances (especially if you are above 30% utilization) can help within a month or two. Paying all bills on time going forward will improve your score gradually over months and years. Avoid closing old accounts or explore for new credit, as both can temporarily lower your score.

What is a good credit score?

Scores above 670 are generally considered good, and scores above 740 are considered very good. Most lenders offer their best rates to borrowers with scores above 750. Scores below 580 make borrowing difficult. However, the exact threshold varies by lender and loan type — some mortgage lenders will work with 620, others require 700.

If I pay off a collection account, does it disappear from my report?

No. Paying off a collection account stops the debt from growing, but the account stays on your report for seven years. However, some lenders view a paid collection more favorably than an unpaid one. The impact on your score also fades over time, so a collection from five years ago hurts less than one from last year, whether paid or not.