Credit Scores Explained: The Basics

A credit score is a number that lenders use to estimate how likely you are to repay borrowed money. It can affect loan approvals, interest rates and sometimes rental applications.

What affects your score

The exact formulas vary, but the main factors are commonly described like this:

• Payment history: whether you pay on time
• Amounts owed: how much of your available credit you are using
• Length of credit history: how long your accounts have been open
• New credit: how many recent applications you have made
• Credit mix: the variety of accounts you have

Ways to build good credit

• Pay every bill on time, and set up reminders or autopay
• Keep credit card balances low compared with your limits
• Avoid opening many new accounts at once
• Keep older accounts open when it makes sense

Check your credit reports

You are entitled to a report from each of the three major credit bureaus at no cost through annualcreditreport.com. Review them for mistakes, such as accounts that are not yours, and dispute errors with the bureau.

Score versus report

Your credit report is the record of your accounts and payment history. Your score is calculated from it. Checking your own report does not hurt your score.

Beware of scams

Be careful of companies that promise to erase accurate negative information or guarantee a specific score. Accurate information generally stays on reports for a set number of years.

Bottom line

On-time payments and low balances are the foundation of a healthy credit score. Build the habits and give them time.

This article is for general information only and is not financial, legal or tax advice. See our Disclaimer.