Key Takeaways

  • Credit worthiness is your ability to borrow money
  • A good credit score of 720 or more tells lenders you can be trusted with credit
  • Your credit score is based on five key factors
  • Your credit report lists your current and recently-closed accounts and payments
  • Check your credit report regularly — it’s free!

Credit can seem mysterious. How is your credit score calculated? What do the numbers mean? How can you boost yours?

Good questions. Here are some answers.

First, let’s define credit. Credit really means your credit worthiness: how a lender or creditor judges your ability to repay borrowed money, whether for a cell phone with monthly payments, an auto loan, a mortgage, or a credit card.

Being smart about debt

Borrowing money, of course, means debt that must be paid back. Debt isn’t inherently bad. Debt that helps you buy an asset such as a home, or make an investment in yourself or your child, such as paying for college, is debt that generally makes sense.

Running up a credit card balance to pay for a vacation you really can’t afford, or expensive clothes you don’t need? Not a great idea. Your tan will be long gone but you’ll still be paying for it. 

Used responsibly, debt can be a tool to help you achieve your financial goals, making it an important part of your overall financial plan.

Are you a good credit risk?

When a lender extends credit or otherwise takes a financial risk, such as renting you an apartment, they have one question: Will you make your loan, rent, or credit card payments on time? They want to know if you’re a good credit risk.

They judge that by looking at your credit report and credit score. 

  • Your credit report shows your history of paying back loans and other financial obligations
  • Your credit score sums up your credit history and current debt situation into a three-digit number

That number can govern:

  • Whether a lender will give you a loan
  • The interest rate you’ll pay on that loan
  • Your ability to qualify for a credit card
  • Your ability to rent an apartment

In many states, a poor credit report can even mean being turned down for a job.

Your credit score

Your credit score is also called a FICO score, named after the firm that invented it; scores are normally between 300-850. You may have also heard of another financial risk scoring system called VantageScore, which uses the same scale.

Anything over 720 is considered good. Once your score is above 720, chances are you’ll qualify for loans or credit cards and pay the lowest rates. In some cases, a  higher score may be needed to qualify.

The five factors that include your credit score

Your FICO score is calculated using five pieces of information: the length of your credit history, the amounts you owe, your payment history, the types of credit you use, and amount of new credit. Pay your bills on time, keep low balances, and show you can handle different types of loans and you’ll have a healthy credit score. Miss a couple of payments or max out your credit cards and your credit score will plummet.

Where the information comes from

Many of the people and businesses you pay in some way — banks, credit card issuers, utility companies — report your payments to three companies, called credit bureaus.

The three major credit bureaus, Experian, Equifax, and TransUnion, do two things:

  • Collect data from creditors and other sources
  • Analyze that data to prepare credit reports and judge creditworthiness

What is a credit report?

A credit report is a list of your credit history, including both current and closed accounts. It lists accounts, on-time and late payments, amount borrowed or owed, pretty much anything tied to your financial life.

Even when an account is closed, information remains on your account for up to seven years. A bankruptcy may be listed on your account for 10 years.

A significant percentage of credit reports contain errors, and the federal Fair Credit Reporting Act (FCRA) includes a way for consumers to review and request corrections to their credit reports. The Consumer Financial Protection Bureau (CFPB), another federal agency, has helpful resources as well.

Check your credit score regularly (it’s free!)

The government requires that you have access to a free copy of your credit report once a year. To spot errors or possible fraud, such as identity theft, we recommend requesting a credit report from one of the three credit bureaus every four months. You can request your free credit reports This is the only official site authorized by federal law.

There are many resources on our site to help you understand and manage your credit and debt. If you have additional questions or want to make a plan to increase your credit worthiness, schedule time to talk with a CFP® professional at Facet Wealth.