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Understanding Credit Score: How It’s Calculated and How to Improve It

Many Americans don’t fully understand how credit scores are calculated or how to improve them. In this guide, we’ll break it down into simple steps so you can take control of your financial future.

PERSONAL FINANCEMARKET

9/19/2025

What Is a Credit Score?

A credit score is a three-digit number (usually between 300 and 850) that lenders use to measure your creditworthiness. The higher your score, the lower the risk you present to lenders.

The most common scoring models in the U.S. are:

  • FICO Score (used by 90% of lenders)

  • VantageScore (gaining popularity with banks and fintechs)

How Is Your Credit Score Calculated?

Your credit score is based on several factors, each with a different weight:

  1. Payment History (35%)

    • Have you paid your bills on time? Late or missed payments hurt your score.

  2. Credit Utilization (30%)

    • Ratio of credit card balances to credit limits. Keeping this below 30% is ideal.

  3. Length of Credit History (15%)

    • The longer you’ve had accounts open, the better.

  4. Credit Mix (10%)

    • A healthy mix of credit cards, loans, and mortgages improves your score.

  5. New Credit Inquiries (10%)

    • Applying for too many new accounts at once can lower your score temporarily.

What Is a Good Credit Score?

  • Excellent: 800 – 850

  • Very Good: 740 – 799

  • Good: 670 – 739

  • Fair: 580 – 669

  • Poor: 300 – 579

💡 Most lenders consider 670+ as the threshold for good credit.

How to Check Your Credit Score for Free

You’re entitled to a free credit report every year from the three major bureaus: Equifax, Experian, and TransUnion. Access it at annualcreditreport.com.

Many banks and credit card issuers also let you check your score for free inside their apps.

Tips to Improve Your Credit Score

1. Pay Bills on Time

Set up automatic payments or reminders to avoid late fees.

2. Lower Your Credit Utilization

Keep your credit card balance under 30% of your limit — under 10% is even better.

3. Don’t Close Old Accounts

Older accounts help build a longer credit history. Keep them open even if you don’t use them often.

4. Limit Hard Inquiries

Only apply for credit when necessary. Too many applications in a short period will lower your score.

5. Diversify Your Credit Mix

Having both revolving credit (cards) and installment credit (loans) shows responsible management.

Common Credit Score Myths

  • Checking your own score hurts it → False (only “hard inquiries” from lenders do).

  • Paying off debt instantly raises score → Partially false (it helps, but it takes time).

  • Carrying a balance improves score → False (you don’t need debt to build credit).

Conclusion: Take Charge of Your Financial Reputation

Improving your credit score doesn’t happen overnight, but with consistent effort, you can raise your number and unlock better financial opportunities. Pay on time, use credit wisely, and check your reports regularly.

📌 Next step: Pull your free credit report today at annualcreditreport.com and review it for errors. Small actions now will lead to big savings in the future.

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