Understanding Your Credit Score

A Guide to Build and Maintain Healthy Credit

In our credit driven society, everyone needs to manage his or her credit score. Credit scores affect your ability to obtain mortgages, car loans, and business loans, and they also influence your insurance rates and your ability to rent an apartment.

Despite its importance, credit scoring is full of myths and misinformation. This guide is designed to debunk credit scoring myths and show you how to manage your credit score based on your goals.

7 Credit Myths

Myth 1 FICO is the only credit score that matters

Fact: If you've ever checked your credit score, you’ve probably checked your FICO 8 credit score. The FICO credit score was developed in 1989, and became widely adopted in 1995 when Fannie Mae and Freddie Mac started using the FICO standard. Since Fannie Mae and Freddie Mac back most mortgages in the United States, FICO 8 (2008 version of the FICO score) is the most prominent credit score today.

Despite FICO’s prominence, thousands of alternative credit scores persist. Banks customize credit scores to suit their own needs.

Nick Clements, founder of MagnifyMoney.com and former Director of Risk Management at Citibank explains that factors such as your history with the bank’s products, your income, overdrafts or average account balances, or how much money you will put down on a car may factor into custom credit scores. Credit card companies may calculate different scores depending on whether you applied via direct mail or the Internet.

If you apply for a mortgage, the bank will use your FICO score, but in other circumstances you won’t know all the factors considered. Still, the FICO score offers overall guidance on your score

Note: You will have more than one FICO score. Each bank uses information from one or more of the three major credit bureaus (Equifax, Experian, or Transunion) to feed your score. So depending on which credit report they use, your score may be different.

You might already have free access to your FICO score from your bank and you can see a list of those that offer free FICO scores here.

You can also use some free sites to see a score that's not your real FICO. Most sites provide the VantageScore, which is pretty close to your FICO score., but is pretty close. You’ll want to check more than one to get a sense of where you stand.

Myth 2 Credit scores measure how rich or poor you are

Fact: Credit scores measure your likelihood of repaying a loan. Banks use credit scores to determine whether or not they should issue a loan to you. While it is important to stay on top of your credit score, credit scores are not financial health scores. Your financial health depends upon earning, investing and spending in addition to how you handle credit.

The flip side is a great credit score doesn’t mean you’re rich. Plenty of wealthy people have not-so-good credit scores, either because they don’t pay on time, or don’t keep credit accounts active.

So don’t be tempted by all the credit lines you’ll be offered when you get a great score. It just means the banks think you’re likely to pay on time because you have a good history of doing so and aren’t over using the credit you have.

You can see exactly what FICO thinks a credit score should measure and how in this booklet.

Myth 3 Carrying a credit card balance boosts your score

Fact: Carrying a credit card balance month to month and paying interest will not boost your credit score any more than paying in full each month. Just having one credit card and paying it off on time and in full can lead to an excellent credit score.

Since every credit score considers payment history, and credit utilization, making on time payments on all your current debts is the best thing you can do to boost your credit score. The next best thing you can do is reduce the credit you use relative to the amount available to you. You should keep your total utilization ratio below 30%. For example, if you have a credit card with a $1,000 limit, then you should spend no more than $300 a month on the card. Neither of these practices requires paying interest.

Myth 4 Resolving negative information is the best way to boost your score

Fact: Negative credit information (such as a loan in default or an unpaid bill) will lower your credit score. It’s best to keep negative information out of your credit history, but once it is a part of your credit history, resolving judgments is not the best way to boost your credit score.

Your top priority should be paying current accounts on time; this is the fastest path to credit repair. Don’t skip payments to resolve debts in collections. Stay focused on paying current debts, and preventing further negative information from entering your report.

If frequent contact from collections agents makes it difficult to maintain your focus take these steps to get rid of phone calls from collections agencies.

Myth 5 Credit utilization doesn’t matter.

Fact: Credit utilization (the amount you owe relative to your available credit) is a prominent factor in credit scores. Loan issuers view high credit utilization as a signal that a borrower has taken on too much debt for their income

Experian Data Analytics released a study that showed people with Vantage Scores (a FICO comparable score that runs from 300-850) of greater than 780 have credit utilization of just 5.6% while subprime borrowers (scores between 500-600) showed credit utilization of 77.2%.

Paying down debts will help you raise your credit score. If you’re a responsible borrower with a low credit limit consider requesting a higher limit to lower your credit utilization.

Myth 6 My partner’s score is great, so mine doesn’t matter.

Fact: Even if you are sharing finances, you and your spouse do not share a credit score, so your partner’s great score won’t boost yours and vice versa.

Both credit scores will be taken into account if you jointly apply for a loan or mortgage.

Couples should work together to improve both of their scores. This means keeping current accounts paid on time, decreasing utilization (if one spouse carries more debt than the other), and working to reduce overall debt loads.

Myth 7 You don’t need to monitor your credit score.

Fact: Anybody who wants to obtain a loan should monitor his or her credit score annually. Monitoring both your credit report and credit score will help you keep tabs on your credit health, and it will give you the opportunity to catch incorrect or fraudulent information.

Even if you don’t use debt, you need to monitor your credit score. Monitoring your credit score allows you to detect and dispute incorrect information. Additionally your credit scores may be used to adjust rates on your car or homeowners insurance, and landlords use credit scores to decide who can rent their property.

The guide to managing your credit score

What makes a good credit score?

1. The two most important factors in your score

While different banks and lending institutions calculate their scores differently, every score factors

1) your history of paying your debts on time, and
2) the amount of debt you currently owe.

Together these factors comprise 65% of the FICO credit score.

You can read more details about what factors go into a credit score here, like the length of your credit history, types of credit you have, and the credit you’ve recently asked for (inquiries). Credit card companies and banks may also consider things not in your score like your past interactions with debt products, your income and whether you have a history of overdrafts or small account balances.

2. You don’t need a perfect credit score

FICO scores range from 300 – 850, with higher being better. Generally a score of 720-750 or above will get you the best rates.

What a ‘good’ or ‘excellent’ score gets you versus a lower score changes with time.

Sometimes, banks want to lend to people they consider riskier, and lower scores might get deals very similar to the very highest scores. Other times, like during recessions, they might want to lend to fewer people, and having a low score will hurt more than during other times.

If you always pay on time, don’t rack up a lot of debt, and don’t ask for a lot of new credit, don’t fret if your score isn’t a perfect 800+.

3. New on time payments and less debt are the biggest positive factors

No matter what your credit goals are, continue to add positive information to your credit report. Paying your loans on time and keeping your debt levels from rising too high are always helpful choices. They are 65% of a typical FICO score.

Late payments that are more than 30 days late will start to hurt your score, so make sure you pay your bills no later than 30 days after the due date.

And more recent on time payments can start to offset late payments several years back, so starting to pay all of your bills on time right away is the single most important step to build your score.

4. You can increase credit limits to build credit

Increasing your credit limit is a great way to decrease credit utilization, but it’s not always wise. The best times to increase your credit limit are when you’ve got your spending under control, after you’ve received a raise, and when you will not request new lines of credit in the next year.

Requesting an increase in your credit limit could generate an inquiry on your credit report, and those can ding your score about 5-10 points for a short period of time – generally no more than one year, and often less.

Your new, higher credit line could positively impact your credit profile if you don’t add any more debt, so only do this if you’re positive you won’t abuse it.

5. Closing old accounts isn’t always a bad thing

Having too many lines of credit open can lead to unnecessary fees, greater chances for identity theft, and overspending. A rule of thumb is to keep no more than four credit cards open at any one time, and cancel any credit card that you haven’t used in over a year.

The exceptions to these rules are people with thin files (very few debt products).

If you don’t have many credit accounts you should always keep your oldest credit card open along with any other cards that don’t have a fee.

6. Don’t obsess over your credit score

If want to qualify for a new loan, it can be tempting to obsess over your credit score, but obsessing won’t help. A history of credit, on-time payments, and decreasing the amount of debt you owe will help you get the credit score you need.

10 or 20 points is not usually going to change the rates you get or loans you qualify for much.

Even with mortgages, loan officers are more concerned about your income and whether you can afford payments than your FICO score.

How fast does your score get updated?

1. The bureau needs to get information from the bank first

The credit bureau has to wait to receive information from the bank or lender before it can update your score.

Together these factors comprise 65% of the FICO credit score.

Generally your balances and on time or late payments are updated shortly after your monthly statement is generated by your bank. So if you pay off a credit card, it could be up to a month before that’s reflected on your report and calculated in your score.

2. The score you see might not be updated right away

Another delay is that the free scores you get online aren’t always updated daily, so you might be dealing with information that’s a month old, and it could take two months before you see your free score change.

But banks and lenders see updated information right away.

Best places to check your score

1. You need to check your score and report

Your credit score alone isn’t very useful in figuring out what’s going on with your credit.

You’ll also need to get your credit report, which shows the detail of which accounts you have open, your current amounts owed, the size of your available credit, and your payment history.

2. Checking your credit report

The best place to get your raw credit report on its own is from AnnualCreditReport.com, the only site authorized by the government to offer your full, free report directly from each of the 3 credit bureaus (Equifax, Experian, and Transunion).

You’re allowed to check your report from each of the 3 bureaus for free once per year, so you can see 3 different reports per year for free.

On top of that you can also get a regularly updated summary of your report from several free services that’s helpful for keeping up to date between your official annual updates:


FreeCreditReport.com, owned by Experian, lets you see your free report monthly, and no longer asks for your credit card information, so you’ll never be billed.


Quizzle.com, a service that advertises credit products, offers a free summary of your Equifax credit report, updated frequently.


CreditKarma.com, a service that advertises credit products, offers a free summary of your Transunion credit report, updated frequently.

3. Checking your credit score

The best place to get your score is from your bank or lender, if they offer a free, real FICO score. Many do, thanks to the FICO’s ‘Open Access’ program, which has been acknowledged by the government, and you can see a list of them here.

Remember to check your score from each of the 3 bureaus, as each bank uses a different bureau or set of bureaus to make decisions.

You can also see an estimate of your score via several free online sites, but know that it’s just an estimate, and not your free FICO. Estimates are available for Experian, Equifax, and Transunion scores and you can see which sites offer which scores here.

How to deal with negative items hurting your score

1. See if identity theft is the issue

If collections agents wrongfully contact you, then you are probably the victim of identity theft. Identity theft is a serious crime, and the best practice is to follow the Federal Trade Commission’s advice on identity theft. Best practices include freezing your credit, filing an identity theft report, and disputing fraudulent charges. Identity thieves can trash your credit, but you have the right to restore it.

2. Continue to add positive information to your report

The most important thing you can do when dealing with negative information is to pay current accounts on time.

It might be tempting to resolve debts in collections to keep collections agencies from calling you, but do not resolve old debts at the expense of on time payments to your current accounts.

3. Know your rights when dealing with collection agencies

Collections agencies have the right to contact you and collect money that you owe, but they cannot threaten you, make false statements, pretend to be anyone else, contact you at work, or tell anyone else about your debt.

If you tell a debt collector in writing to stop contacting you, they cannot legally continue to contact you.

The Federal Trade Commission outlines your rights, and they also offer guidance for further resources.

You can also read our guide to dealing with collection agencies.

4. Don’t pay someone to “fix” your credit score

“Credit repair” companies cannot fix your credit. These companies attempt to prove that you do not owe money on debts that are in collections, but they rarely succeed. The best way to use your money is to pay down debts on current accounts.

5. Consider writing a letter of goodwill.

If the negative information in your credit history was the result of unusual or extenuating circumstances, consider writing a letter of goodwill to your creditor to request that the negative information be removed from the report.

6. Time heals all wounds

If you have negative information on your credit report, remind yourself that time will heal your credit. After seven years, negative information will be removed from your credit history. In the meantime, the further past the negative information, the less of a factor it plays in your credit scores. As long as you continue to add positive information to your report, your credit score will improve over time.

If you’re struggling with paying off your debt, read our guide to being debt free forever, with step-by-step help.

How to establish credit for the first time

1. Don’t plan on paying interest

You do not have to pay interest to have a high credit score. It is possible to develop a credit score of 750+ by paying off a single credit card on time and in full every month. Don’t plan to pay interest just to build your credit score.

There is nothing in the scoring models that rewards carrying credit card debt month to month over paying in full each month.

2. Decide how to build your credit

As a new borrower, it can be tough to find a product to build your credit. The most accessible products to new borrowers are student loans, secured credit cards, or credit cards with a co-signer.

If you pursue higher education, you most likely qualify for student loans. Taking out a student loan establishes your credit history, but they won’t help you build your credit score until you start to pay them. If you need to grow your credit score before you graduate from school, then you need another product to establish a history of on time payments.

Secured credit cards are an accessible product for all new borrowers.

Secured credit cards require a deposit backing the credit card; you may also have to pay an annual fee on the card. Your deposit is refunded when you close the card, as long as it’s in good standing. On the plus side, secured credit cards can help you establish a decent credit score within a few months, and you can quickly upgrade to an unsecured card.

A fallback to consider is an unsecured credit card with a co-signer. If you have a parent or spouse who will co-sign for you, this may be your quickest route to a high credit score. Remember, if you default, your co-signer will be on the hook for your debt.

3. Plan to keep your first credit card indefinitely

Once you receive your first unsecured credit card, keep the card indefinitely. This card will establish the length of your credit history. Most people choose a no fee rewards card or a bank credit card as their first credit account.

4. Pay your bill on time

Once you obtain a credit product, pay your bill on time, every month. This is the most important thing you can do to raise your credit scores. Late payments quickly erode your score.

5. Avoid Negative information

While building your credit score, keep negative information from entering your report. Negative information comes from late or unpaid rent, cell phone or medical bills. Your credit score will suffer more if these bills end up in collections.

Preparing your credit for a mortgage

1. Your FICO score matters

If you apply for a mortgage, then your FICO 8 score will factor into whether or not you are approved. Check your credit score for free before you start applying for loans.

But don’t fret over not having a perfect 800+ score unless you’re looking for a very large mortgage. Your income and whether it can handle the house payment and your existing debts is a much more important factor.

2. Pay down existing debts you can

Credit utilization is a component of your FICO credit score, and your debt-to-income ratio is a relevant factor in your mortgage approval, and is often the biggest borderline factor.

Paying off revolving credit (like credit cards), and paying down student loans and car loans will improve your prospects of a mortgage approval and getting the best rates.

Of course, this is always a tough balance when you’re saving for a down payment. But it’s better to both lower your debt burden to avoid being locked into a higher interest rate and save for a full 20 percent down payment. A 20 percent down payment can help reduce your monthly payments and avoid mortgage insurance.

3. Don’t apply for new credit

Applying for new lines of credit like a car loan or credit card during your mortgage application process is a mistake. You want your credit score to be as strong as possible and hard inquiries will lower your score.

4. Fix discrepancies on your credit history

Before you apply for a mortgage, be sure that your credit history matches reality. If you’ve paid a bill in collections, it should be marked as resolved. Additionally, you shouldn’t see any erroneous account information.

If something in your credit report is incorrect, you have the right to dispute that information.

Warning: While you should get discrepancies fixed, if you file a dispute and it is still unresolved, it could prevent you from getting a mortgage, even if you would otherwise qualify. So get all open disputes closed before applying for a mortgage.

5. See how your credit score affects your interest rate

Lenders consider many factors when determining a mortgage interest rate, and your FICO score is an important factor. The FICO website has a mortgage calculator that can help you determine how much you might save with excellent credit. The rates in the calculator aren’t guaranteed, but it offers guidance on how much great credit might be worth to you.

And this site from the Consumer Financial Protection Bureau shows you real, current mortgage rates in your area based on your credit score range.

You might find that having a higher score doesn’t impact your rate much, or that you could save thousands by improving your score 50-100 points. If it does, spend time building your score before you dive into a mortgage.

Building (and using) credit without incurring any debt

1. Pay off one credit card in full every month

If you hate paying interest, don’t pay it. You can maintain an excellent credit score by regularly paying off single credit card that has a high limit. You might even have the opportunity to enjoy a few rewards without paying interest.

2. Keep your oldest credit line open

If you avoid debt, you probably have a thin credit file. Keeping your oldest credit card account open establishes a long credit history, and it will keep your credit score elevated. You’ll be prepared if you’re ever in need of a loan. If you’re ever in need a loan or a high credit score, you will be prepared.

3. Monitor your credit score annually

If you don’t regularly use credit, you can still be the victim of identity theft. Monitor your credit report annually to catch and clean up fraudulent activity.

4. Be wary of 0% loans

Understand how to properly utilize a 0% balance transfer.

If you’ve gotten into debt, but you hate paying interest, consider applying for a 0% balance transfer credit card. There is a catch: you’ll have a hard pull on your credit report. However, the drop of 5 to 10 points can be well worth it if you aggressively make payments to wipe out the debt by the end of the promotional period. You may also reduce your utilization ratio because you’ve increased the total available credit limit. Just don’t make any new purchases on your balance transfer card and pay it on time each month, but before you utilize these zero percent loans, remember they count towards your credit score.

5. Pay all your bills

If you don’t use credit often, the worst thing for your credit score is the introduction of negative credit information. Negative information can be the result of unpaid bills sent to collections or missed payments on credit cards or loans.

Pay bills before they reach the collections stage, and if they are too high, work out an installment plan directly with your provider.

Using a good score for big rewards

1. Start slow.

You can use your score to get offers for credit cards with bonuses and cash back or other rewards. Banks are always fighting for business, and it’s okay to open more than one card in order to earn bonuses and rack up rewards.

But you can ruin your credit score if you apply for a lot of credit all at once or increase your credit utilization to meet spending minimums or fail to pay a credit card on time.

If you want to successfully maximize rewards, start slow, and be sure that you can pay off your cards on time and in full every month.

2. Monitor your credit score often.

The more cards and accounts that you have open, the more likely it is that you have some incorrect information in your account. Keep a close eye on your credit report by checking it for free. Don’t worry, soft inquiries won’t hurt your credit score.

3. Don’t increase credit utilization

You should be able to meet spending requirements on reward cards without increasing your overall spending.

If you increase your spending, and you can’t pay your bill in full each month, your credit utilization will slowly climb and erode your credit scores. Paying interest on your rewards also negates the benefit of earning them in the first place.

4. Watch out for credit inquiries

Each credit type (such as a credit card) that you apply for within a 30 day window will count as a hard inquiry, and will ding your score by about five points. Reward seekers who frequently apply for new credit cards run the risk of death by a thousand cuts.

If you notice your score falling, limit the frequency of new credit card applications. It’s also wise to avoid applying for new credit cards if you need other lines of credit soon.

5. Establish a good credit history first

Seeking out lots of rewards offers is not for people who are new to credit. Without a high credit score, you may not qualify for some of the best rewards cards, and frequent hard inquiries can damage your credit score when you’re first starting out.

But a high credit score and consistent credit history makes you eligible for the best products on the market.