Your credit score follows you everywhere. From buying a car to applying for a mortgage, many people don’t realize how much that three-digit number impacts their long-term financial picture. In this article, we’ll break down everything you need to know, from how your score is calculated to common myths and practical steps you can take to strengthen it.
What Is a Credit Score?
A credit score is a three-digit number ranging from 300 to 850 that measures your credit history and ability to pay off loans. Essentially, how much risk a lender takes by extending your credit.
While there are multiple scoring systems, such as VantageScore and FICO, FICO is the most widely used. 90% of U.S. lenders rely on FICO. Your score influences everything from the interest rate you pay to whether you’re approved at all. The average FICO score in the U.S. is 715, and only about 24% of Americans have an ‘exceptional’ credit score (800-850).
Who Uses Credit Scores?
- Banks and mortgage lenders
- Credit card providers
- Landlords and property managers
- Utility companies (to decide if you need a deposit)
How Is Credit Score Calculated?
Your FICO score is calculated using five categories:
- Credit History (35%) – Do you pay bills on time?
- Amounts Owed (30%) – How much debt do you have vs. the actual credit limit?
- Length of Credit History (15%) – How long your accounts have been active?
- Types of Credit (10%) – A healthy, diversifed mix of accounts (loans, mortgage, credit cards)
- New Credit (10%) – Too many applications in a short time can hurt your score
The two most important factors are payment history and amounts owed. That accounts for nearly two-thirds of your score.
Why Your Credit Score Is Important
Good credit doesn’t just help you get approved. It can also save you money. After all, a credit score is essentially a reflection of your financial habits.
Example: Auto Loan
- Person A (Score: 800) → 4% interest rate
- Person B (Score: 620) → 10% interest rate
On the same five-year loan, Person B pays about $70 more per month or $4,200 more in five years. That’s money going to the bank instead of building your financial future. If this money could have been invested instead, those dollars could grow into tens of thousands of dollars over time with the magic of compounding.
Debunking Common Credit Myths
- Myth #1: Checking my score will hurt it.
- Reality: Soft inquiries (like Credit Karma or your bank app) don’t impact your score. What will have an impact is when you pull your credit to open an account.
- Myth: #2: I need to carry a balance to build credit.
- Reality: Carrying a balance just means paying interest, often over 20% on credit cards.
- Myth #3: I can fix my score overnight.
- Reality: Like fitness, improvement takes time, consistency, and discipline. Slow and steady wins the race!
- Myth #4: There’s only one score.
- Reality: You may have multiple, depending on the scoring model and reporting agency.
How To Boost Your Credit Score
Here are practical best practices to strengthen your score:
- Pay bills on time – Consider setting up notifications, autopay, or reminders.
- Consider utilization – Try to stay below or at 30% of your available credit limit. If your monthly credit limit is $3,000, aim to stay below $900 on your monthly bills.
- Don’t close old accounts – They help your length of credit history. If you close an old credit card (especially with great payment history), the history of that card goes with it.
- Diversify credit types – A mix of accounts shows responsibility.
- Limit new applications – Too many at once can look suspicious and trigger warning bells for lenders.
- Check your credit reports regularly – Don't just let it run in the background. Review for errors and dispute inaccuracies.
Tools and Resources
FICO and VantageScore pull from three credit bureaus: Equifax, Experian, and TransUnion.
- Credit Karma – Free, detailed credit monitoring
- Your bank or credit card provider – Most now offer free FICO scores
- AnnualCreditReport.com or MyFICO.com
- Financial wellness programs, advisors, or our Accelerate app
Your credit score is more than a number. It’s a key factor in shaping your financial future! By taking simple, consistent steps, you can raise your score, save money, and set yourself up for greater long-term success. Reach out to our team to learn more about strategies to improve your financial wellness!