What Is a Credit Score?

Your credit score is a number based on how you’ve repaid debts in the past. The higher it is, the better you look to potential creditors (who also look to see if you have enough money to pay the loan they may offer you).

Credit scores fall along a scale — usually 300 to 850 — that is designed to measure how likely you are to repay a loan or credit card as agreed. Where you are on that yardstick affects whether you can get approved for credit and sometimes the interest rate or other charges you will pay.

Credit scores are calculated based on your credit reports, which are lists of your credit activity. This information is compiled by the big credit reporting agencies: Experian, Equifax and TransUnion. (You’re entitled to at least one free annual credit report from each agency.)

All credit scores consider, to differing degrees, the same factors:

• Your on-time payment history.
• How long you’ve been borrowing money.
• Balances you owe and how much of your available credit you are using.
• Whether you have applied for a lot of credit recently.
• What kinds of credit you have (credit card versus installment debt).

Your credit report is just a collection of data. Your score is an interpretation of that data — a numerical assessment of how likely you are to repay borrowed money.

What a credit score is not

A credit score is not a moral judgment. People can have low credit scores for a variety of reasons, including a medical emergency that came with big bills, identity theft or a collections account they knew nothing about.

A credit score does not by itself indicate how well you are doing financially. You can bury yourself in debt, but as long as you make the payments on time and aren’t using more than 30% of your available credit, you can have a great score.

A credit score doesn’t consider your income, your savings or how secure your job is.

A credit score doesn’t affect your job prospects. When a potential employer “checks your credit,” the employer sees your credit report, not your credit score.

Credit scores affect you even if you don’t borrow

You may not plan to borrow money, but even businesses that don’t lend money may check your scores for other reasons. Credit scores may be used by landlords to decide whether they want you as a tenant and by car insurance companies, who often charge higher rates to people with poor credit scores.

A great credit score means you’ll easily qualify for the lowest interest rates on loans and the best credit card terms. You may even get to skip making utility deposits. On the other hand, a low score can mean you have many fewer choices — and you’ll be making those deposits. You might pay more for insurance and have trouble finding a place to live.

Does everyone have a credit score?

Your credit file begins when your credit history does. (See “How to build credit.”)

If you’ve never been listed on a credit card or a loan, you probably don’t have a score. (Minors shouldn’t have them, for example, but some do as a result of identity theft.) Some people who haven’t used credit in years can become “credit invisible,” and millions of others are unscorable because of little or no information in their credit files.

Some newer scoring formulas now use alternative data, such as cell phone and utility payment records, to help generate scores.

(If you want credit but can’t get it because of a thin file, a secured credit card or a credit-builder loan may help. After a few months of building credit, you’ll have a credit score.)

The most commonly used score for lending decisions, produced by Fair Isaac Corp., is called a FICO score. Its chief competitor is VantageScore, jointly developed by the three major credit reporting agencies. The scores you can see for free online are generally VantageScores. Those scores are also on a scale of 300 to 850, and if you have a good VantageScore, you’re likely to have a good FICO score. Both scores suggest a person has good credit habits.

Bev O’Shea is a staff writer at NerdWallet, a personal finance website. Email: boshea@nerdwallet.com. Twitter: @BeverlyOShea.

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