A complete guide to how credit scores work: the factors that determine your score and why it matters.
- It influences the interest rates you pay on mortgages, car loans, and credit cards, whether you are approved for rental housing, and sometimes even your employment prospects.
- Your credit score is a three-digit number that summarises your creditworthiness based on your history of managing debt.
- The Five Factors Payment history accounts for approximately 35% of your FICO score and is the single most important factor.
Your credit score is a three-digit number that summarises your creditworthiness based on your history of managing debt. It influences the interest rates you pay on mortgages, car loans, and credit cards, whether you are approved for rental housing, and sometimes even your employment prospects.
The Five Factors
Payment history accounts for approximately 35% of your FICO score and is the single most important factor. Paying every bill on time is the foundation of a good credit score. Even one missed payment can cause a significant drop that lingers for up to seven years.
Credit utilisation accounts for approximately 30% and measures how much of your available credit you are using. If you have $10,000 in total credit limits and $3,000 in balances, your utilisation is 30%. Lower is better, with below 10% being ideal for the best scores.
Length of credit history accounts for approximately 15%. Longer credit histories are better because they provide more data about your behaviour. This is why closing old cards can hurt your score.
Credit mix accounts for approximately 10%. Having different types of credit (credit cards, instalment loans, mortgage) demonstrates the ability to manage various forms of debt.
New credit inquiries account for approximately 10%. Each hard inquiry can temporarily lower your score by a few points. Avoid applying for multiple credit cards in rapid succession.
Score Ranges
Exceptional scores of 800 to 850 qualify you for the best available rates. Very good scores of 740 to 799 qualify for excellent rates. Good scores of 670 to 739 qualify for competitive rates. Fair scores of 580 to 669 result in higher rates. Poor scores below 580 make obtaining credit difficult and expensive.
Checking Your Score
You are entitled to free credit reports from all three bureaus annually through AnnualCreditReport.com. Many credit card companies also provide free score access. Checking your own credit is a soft inquiry and does not affect your score.
Credit scores are one factor in lending decisions. Individual lender criteria vary. See our financial disclaimer for important disclosures.
A worked example
Consider Maria, who started with a 620 credit score. She paid off her two credit cards down to under 10% utilization and set up autopay on all bills. Six months later her score was 695. Twelve months in: 745. When she refinanced her mortgage at 745, the rate quote was 0.625% lower than at 620 - on her $320,000 loan, that's about $42,000 in interest saved over 30 years.
Common mistakes to avoid
- Closing your oldest credit card 'to simplify.' That instantly reduces your total available credit (raising utilization) and eventually reduces average account age. Both hurt your score.
- Maxing out one card even if you pay it off. Card issuers report balance at statement close. Hit 80%+ utilization on one card and your score drops 50+ points until the next statement, even if you pay in full.
- Applying for multiple cards in a short window. Each hard inquiry takes 5-10 points off temporarily and signals to lenders that you may be desperate for credit.
Frequently asked questions
How long does it take to raise a credit score?
Most people see meaningful movement in 60-90 days once they stop the behaviors that hurt the score - high utilization, late payments, recent applications. Big jumps (100+ points) typically take 6-12 months of consistent on-time payments and low utilization. Negative items (collections, late payments) age out of your report after 7 years.
What is the most important factor in a credit score?
Payment history is 35% of your FICO score - the single biggest factor. Credit utilization (the percentage of available credit you're using) is 30%. Length of credit history is 15%. Credit mix and new credit each account for 10%.
Does checking your own credit hurt your score?
No. Checking your own credit through services like Credit Karma, your bank, or directly with the bureaus is a 'soft inquiry' and has zero effect on your score. Only 'hard inquiries' from lenders during credit applications affect your score, and even those drop off after 12 months.
What credit score do I need for a mortgage?
Most lenders want 620+ for a conventional mortgage and 580+ for an FHA loan. But 740+ unlocks the best rates - on a $400,000 mortgage, that can save you $40,000+ over the life of the loan compared to a 660 score. Aim for 740+ before applying if you can.
Should I close old credit cards?
Usually no. Closing a card reduces your total available credit (raising utilization) and eventually reduces the average age of your accounts. Both hurt your score. The exception is cards with annual fees that you're not using - then it's a math question between the annual fee and the temporary score impact.
Where this guide fits in
This article is part of the Chase The Dollar editorial library of practical money guides. We update guides as rules and rates change. If you spot a mistake or want us to cover a topic, the contact form is the fastest way to reach us.