How Credit Scores Work

Learn what a good credit score is, how credit scores are calculated, and why your credit score is important.

By , Attorney University of Denver Sturm College of Law
Updated 4/16/2024

A "credit score" is a number based on information in your credit report, which a credit reporting agency, like Equifax, Experian, or TransUnion, produced. Mortgage lenders, credit card companies, home equity lenders, auto loan lenders, and finance companies review your credit scores when you apply for a loan or credit.

In theory, the higher your scores, the less likely you'll default. A low score can affect your ability to get a loan or credit, or convince the lender to charge you higher interest.

Having a good mix of different types of credit, like mortgages and student loans, can improve your scores—so long as you pay on time. On the other hand, missed payments will hurt them.

How Credit Scores Are Calculated

Credit scoring companies, like FICO, and credit reporting agencies come up with credit scores based on what's in your credit reports using an algorithm or mathematical model. This type of score is sometimes called a "credit risk score" because it supposedly predicts the risk that the consumer will default on a loan or other type of credit in the future.

The most common score producer is FICO. According to FICO, its scores are used in over 90% of lending decisions. You actually have more than one FICO score because FICO has many different scoring models.

So, your score will likely vary depending on the model—like FICO, FICO 8, FICO 9, or FICO 10T—used to produce it and which credit reporting agency provided the underlying credit report. FICO also offers industry-specific variations of its scoring models, like for the auto, credit card, and mortgage industries.

Credit Score Ranges

FICO scores generally range from 300 to 850. The higher your credit score, the more likely you'll qualify for a loan or credit. It also might mean you'll get a better interest rate and favorable payment terms.

Another type of credit score is VantageScore. The credit reporting agencies created this score to compete with FICO. VantageScore also has different scoring models, like the 3.0 and 4.0 models. VantageScore used to have a different range of scores than FICO, but now it uses the same range—300 to 850.

What Your Credit Score Is Based On: Credit Scores Explained

While FICO doesn't divulge exactly how it mathematically calculates credit scores, it considers the following factors (with the approximate weight FICO assigns to each factor in parentheses):

  • Your payment history (35%). Your score is negatively affected if you've paid bills late, had an account sent to collection, or declared bankruptcy. The more recent the problem, the lower your score.
  • Amounts owed (30%). Owing an amount that's close to your credit limit is likely to harm your score. Also, carrying a balance on many accounts might lower your score because it looks like you're overextended.
  • Length of your credit history (15%). The longer your accounts have been open, the better.
  • New credit (10%). Recently opening many new accounts can negatively affect your score.
  • Credit mix (10%). FICO says it's looking for a "healthy mix" of credit types, both revolving and installment accounts.

What Is a Good Credit Score?

Again, FICO scores generally range from 300 to 850. The highest score on most scales is 850, though some models produce a different range.

Lenders usually consider borrowers who have scores above 680 as less risky. Those with scores over 760 usually get the best rates. People with scores of 620 and lower are typically considered riskier.

If your score is low, you might have difficulty convincing a creditor to make you an affordable loan or any loan. But just as your credit history can vary depending on which credit reporting agency produced the report, so can your credit scores. It's possible to have a relatively high score with one scorer and a somewhat lower score with another, just as you might have a good credit report with one agency and a muddied record containing errors or inaccurate information with another.

How to Check Your Credit Score

Unfortunately, unlike your credit reports, you're not automatically entitled to one free credit score per year. But in some situations, a creditor must provide you with the credit score it relied on in a credit transaction or decision, like when:

  • you apply for a residential mortgage
  • it charges you a higher interest rate, or
  • your state requires the creditor to disclose your credit score.

The rules regarding when creditors must provide your credit score are complicated. So, the best policy is to ask for more information whenever a creditor denies you credit, offers credit terms less favorable than those you requested (or think you deserve), reduces your credit limit, or cancels your credit card.

How to Get Your Credit Score for Free

You might be able to get your score for free from your credit card issuer. Getting a FICO score is more useful than a VantageScore because lenders use that score more frequently. Experian will also provide you with a free score based on the FICO Score 8 model, though you'll have to create an account with the company to get it.

Paying For Your Credit Score

You can also pay to get your credit score. The FICO website offers access to up to 28 of the most widely used FICO score versions, including mortgage, auto, and credit card versions, and access to a copy of credit scores based on your Equifax, Experian, or TransUnion file. But you might also have to pay for credit monitoring to get them.

Other companies, including the credit reporting agencies, offer credit scores for sale, but it's not always worth the money because you might not get the scores that creditors really use. Instead, companies sometimes sell scores developed to assist consumers in understanding credit scores or a VantageScore, which fewer creditors rely on.

Even if the company does provide your real credit score, because creditors use different scores (and sometimes generate their own), you can't be sure that the score you buy is the one any particular creditor will look at. Also, if you purchase your score from one of these companies, watch out for extra fees for services like credit monitoring, which can drive up the price.

Which Credit Score Matters Most?

Again, FICO claims that its scores are used in more than 90% of lending decisions. Ultimately, the score that matters most to you is the one that any particular lender or creditor relies on after you apply for credit.

Which Credit Score Is Used for Mortgages?

For the past 20 years or so, Fannie Mae and Freddie Mac have required lenders to use the "Classic FICO" credit score when evaluating borrowers' credit for a mortgage.

But on October 24, 2022, the Federal Housing Finance Agency (FHFA) announced that it would eventually require lenders to deliver FICO 10T and VantageScore 4.0 credit scores with each loan sold to Fannie Mae and Freddie Mac. (The FHFA is the government agency that oversees Fannie Mae and Freddie Mac.) This transition is likely to occur sometime in 2025.

What Makes FICO 10T and VantageScore 4.0 Different From Classic FICO?

Both FICO 10T and VantageScore 4.0 include payment history information such as rent, utilities, and telecom payments when available. So, the FHFA believes using these more recent, innovative scoring models will improve accuracy when it comes to evaluating a person's creditworthiness.

Because both FICO 10T and VantageScore 4.0 are more accurate than Classic FICO, the mortgage market will get a better risk assessment by looking at scores from these models. The FHFA also thinks using these models will strengthen borrowers' access to credit.

The theory is that using these scoring models will benefit borrowers, lenders, and Fannie Mae and Freddie Mac.

When Does This Credit Scoring Change Go Into Effect?

After a multiyear transition period, lenders must deliver loans to Fannie Mae and Freddie Mac with both FICO 10T and VantageScore 4.0 scores when available.

Other Changes to Fannie Mae and Freddie Mac Policies

Fannie Mae and Freddie Mac are also ending a practice that required lenders to get reports from all three consumer reporting bureaus when evaluating mortgage applications. Now, Fannie Mae and Freddie Mac will require two credit reports.

How Missed Mortgage Payments or a Foreclosure Affects Your Credit Score

Missed mortgage payments and a subsequent foreclosure will damage your credit score. Lenders report missed payments to the credit reporting agencies as 30 days late, 60 days late, 90 days late, etc. According to FICO, a person's credit score drops about 50 to 100 points when the lender reports the account as 30 days past due, and each subsequent delinquency lowers the score further.

After a foreclosure, your score will likely go down by at least 100 points. How much the score will fall depends, to some extent, on your score before the foreclosure started. Someone with a higher score before foreclosure generally loses more points than someone who already has a low score. Short sales and deeds in lieu of foreclosure have a similar effect on credit scores.

How Student Loans Affect Your Credit Score

Having student loan debt will affect your credit score, perhaps positively, maybe negatively. If you consistently make your loan payments on time, having student loans can boost your score.

Also, remember that FICO likes to see a mix of credit types; credit diversity makes up 10% of your score. So, having student loans along with other debts, like a mortgage and credit cards, is a good thing.

And the length of your credit history accounts for 15% of your score. If you've been paying on a particular student loan account for several years, that will help your score. But if you pay late—or worse, if you stop making payments altogether—your credit score will take a significant hit.

Getting Help

If you want more information about improving your credit score or you need help correcting your credit report, consider talking to an attorney or an accredited, nonprofit credit counseling agency, like one affiliated with the National Foundation for Credit Counseling (NFCC).

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