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What is a Credit Score & Why Does it Matter?

Last updated June 25, 2021

What is a credit score?

A credit score is a three-digit number, typically on a scale of 300 to 850, that estimates how likely you are to repay borrowed money (credit cards, department store cards, car payments, etc). In the US, there are three major credit bureaus: Equifax, Transunion, and Experian. Each bureau has its own equation for determining your credit score.

What are the credit score ranges?

Credit scores range of 300 to 850. While they vary slightly by institution, below are the general credit score ranges:

  • Excellent Credit: 720 - 850
  • Good Credit: 690 - 719
  • Fair Credit: 630 - 689
  • Poor Credit: 629 and below

What factors determine your credit score?

There are 5 components that determine your credit score.

  1. Payment history (35% of your credit score). Your payment history is a record of your on-time and late payments from past loans and credit cards. Payment history makes up the largest percentage of your score. Late payments lower your score, so always be sure to pay your bills early or on time and never skip or miss a payment.
  2. Amounts owed: (30% of your credit score). Also known as your debt to credit ratio, this number shows how much debt you owe and how much of your available credit you have used. A good rule of thumb is to spend no more than 30% of your available credit. For example, if you have a credit card with a total available amount of $500, you don’t want to have a balance of more than 30% or $150.
  3. Length of credit history (15% of credit score). The length of your credit history matters. Your credit score is impacted by how long your credit accounts have been open; the age of your oldest account; the age of your newest account; and the average age of all your accounts combined.
  4. How many types of credit in use (10% of your credit score). Having a variety of credit types will help boost your credit score. This includes auto loans, student loans and credit cards, and other lines of credit.
  5. Account inquiries (10% of your credit score). Whenever you apply credit (credit card, department store card, car loan, etc.), lenders will review your credit score. Each time they do, the credit bureaus keep track. Having too many credit account inquiries can lower your score.

Why do credit scores matter?

Your credit score is important because it affects your eligibility for loans, credit cards and other financial resources. It also has an impact on:

  • How high your interest rate will be for credit cards, car payments, and other loans;
  • Renting an apartment - landlords have the right to turn down your apartment application based on your credit score;
  • Paying for utilities, like electricity - a low credit score means you may have to pay a higher down payment or deposit, just to get your lights turned on;
  • Job prospects - in some states, employers have the right to deny you employment based on your credit history.

Where can I find my credit score?

If you never had any credit cards, joint bank accounts, rental agreements, utility bills, or loans in your name, you probably do not have a credit score (yet). Here is how you can start building your credit responsibly. For those who do have a credit history, you can pull your credit report for free once a year by heading to annualcreditreport.com to review your credit history. To see your credit scores, you can contact the three credit bureaus (Equifax, TransUnion, and Experian) - this does require a small fee and will require you to know your social security number along with additional personal information.

Be careful with sharing personal information online. Identity theft is real and there are several sites that pretend to show you your credit score for free in order to get your information. Please read the fine print before moving forward and enlist a trusted adult to help you with this process.

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