What Is a Credit Score?

20 hours ago

6 min read

At some point, you've probably heard someone say they have "good credit" or that a low credit score prevented them from buying a car, renting an apartment, or getting approved for a loan.

But what exactly is a credit score?

A credit score is a number that helps lenders estimate how likely you are to repay borrowed money. While it doesn't determine your financial worth or define how responsible you are as a person, it can have a significant impact on many financial opportunities throughout your life.

Understanding how credit scores work is one of the most important steps toward building a healthy financial future.

What Is a Credit Score?

A credit score is a three-digit number that summarizes information from your credit history.

The most commonly used credit scores generally range from 300 to 850, with higher scores indicating a lower risk to lenders.

When you apply for certain financial products or services, companies may review your credit score to help decide whether to approve your application and what terms to offer you.

In simple terms, your credit score is one tool that helps answer the question:

"Based on this person's history, how likely are they to repay what they borrow?"

A Brief History of Credit Scores

Credit hasn't always been measured by a three-digit number.

Before modern credit scoring systems existed, lenders often made lending decisions based on personal relationships, handwritten records, or their own judgment. This process could be slow, inconsistent, and sometimes unfair, as different lenders often evaluated applicants using different standards.

In 1989, the first widely used FICO® credit score was introduced to create a more consistent way of measuring credit risk. Instead of relying solely on personal opinions, lenders could use information from a person's credit history to help predict how likely they were to repay borrowed money.

Over time, credit scoring became the standard across much of the financial industry. Today, while several scoring models exist, credit scores remain one of the primary tools lenders use when evaluating applications.

Although a credit score cannot tell the complete story of someone's financial situation, it provides a standardized way for companies to assess risk using the same general criteria for every applicant.

Why Credit Scores Affect So Many Areas of Life

Many people are surprised to learn that credit scores can influence much more than whether you're approved for a credit card.

A strong credit history can affect your ability to:

Qualify for a mortgage when buying a home.
Receive favorable interest rates on auto and personal loans.
Rent an apartment, as many landlords review credit history during the application process.
Finance large purchases.
Open certain utility accounts without paying a security deposit.

In many states, insurance companies may also use a credit-based insurance score when determining premiums for auto or homeowners insurance. While this is not the same as your traditional credit score, insurers have found that certain patterns in a person's credit history can help predict the likelihood of future insurance claims. Some states restrict or prohibit this practice, while others allow insurers to consider it as one of many rating factors.

Because credit can influence so many financial decisions, building a positive credit history early can make major life milestones more affordable and accessible.

What Information Is Used?

Your credit score is based on information contained in your credit report.

While different scoring models use slightly different formulas, they generally look at factors such as:

Whether you pay your bills on time.
How much of your available credit you're using.
How long you've had credit accounts.
The types of credit you've used.
How often you've recently applied for new credit.

We'll explore each of these factors in more detail in the next article.

Just as important is understanding what doesn't directly impact your credit score.

Generally speaking, your credit score is not based on:

Your age.
Your race or ethnicity.
Your religion.
Your marital status.
Your income.
The amount of money in your checking or savings account.
Your job title.

While some lenders may consider income or employment when deciding whether to approve a loan, those factors are separate from your credit score itself.

How Do You "Get" a Credit Score?

You aren't born with a credit score, and opening a bank account doesn't automatically create one.

Your credit history begins only after information starts being reported to the major credit reporting agencies.

For many people, this happens after opening their first credit card, taking out a student loan, financing a vehicle, or becoming an authorized user on someone else's credit card account.

If you've never used credit before, it's completely normal not to have a credit score yet. However, this can affect your opportunities in a similar way to a mid-level, or bad, credit score. From a lender's perspective, having no credit history can make it difficult to predict how you'll manage borrowed money.

That's why many young adults and first-time borrowers focus on building credit before they need it. Establishing a positive credit history early can make future financial decisions much easier, especially as you move towards larger purchases like a home.

Can Your Credit Score Change?

Yes.

Unlike something permanent, your credit score changes over time as new information is added to your credit report. Your score may increase after consistently making on-time payments and using credit responsibly.

It may decrease if you miss payments, carry high balances, or experience other negative events that affect your credit history. Because your credit score reflects ongoing financial behavior, it's normal for it to change from month to month.

It also is common for one missed payment to cause a much larger hit to dropping your score, than 30 consistent on-time payments improving your score. Credit score improvement tends to take a long time, sometimes even years. While a drop in credit score can happen in as little as a month.

For example: Let's say your credit is current 670.

You have two credit cards that you make payments on every single month without fail, for the last 18 months. In October, you had to miss a payment because you lost your job. Your credit score may drop even as far as 30 points from that one missed payment, down to a 640, despite 18 on time payments.

It is extremely important to know that while it may not seem fair, it does happen. So knowing what you can, and cannot, afford to repay is crucial.

Why Different Websites Show Different Scores

If you've ever checked your credit score through multiple websites, you may have noticed the numbers don't always match. This is completely normal.

There are multiple credit scoring models and lenders don't all use the same one.

In addition, different companies may receive updated information at slightly different times.

Rather than worrying about a small difference between scores, it's generally more helpful to focus on maintaining healthy financial habits that improve your credit over the long term.

While building excellent credit doesn't happen overnight, most people can improve their credit over time by developing consistent financial habits.

Some of the most important include:

Paying bills on time.
Keeping credit card balances low.
Avoiding unnecessary debt.
Applying for new credit only when needed.
Monitoring your credit reports for errors.

We'll cover these strategies in much greater detail in future articles.

Final Thoughts

Your credit score is one of the most important financial numbers you'll have, but it doesn't have to be intimidating.

Think of it as a snapshot of how you've managed credit over time. It doesn't measure your income, your intelligence, or your financial potential. Instead, it provides lenders with information that helps them evaluate financial risk.

The good news is that healthy financial habits, such as paying bills on time and using credit responsibly, can gradually strengthen your credit history over time.

Understanding what a credit score is, is the first step. The next step is learning how it's actually calculated and why certain financial decisions affect your score more than others.

Up Next: Now that you know what a credit score is, we'll take a closer look at how credit scores work, including the factors that influence your score and why some actions have a bigger impact than others.

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