What is a credit score and how does it work? | Fidelity (2024)

Do you know what your credit score is? You should. This 3-digit number helps lenders understand how ”creditworthy” you are—in other words, whether they’re likely to lose money if they lend it to you. Your credit score can also influence loan terms, such as how much interest you’ll pay on borrowed money.

Read on to learn more about what a credit score is, how it’s calculated, ways to improve your score, and answers to other commonly asked questions about credit.

What is a credit score?

According to FICO^®, a data analytics company that calculates credit scores, a credit score is a number that typically runs from 300 to 850 that creditors (think: banks and other financial companies) use to understand how risky it is to lend you money or issue you credit. Generally, the lower your credit score, the riskier you appear as a borrower. The higher your credit score, the safer you seem.

Why do credit scores matter?

A low credit score could disqualify you entirely from getting a new loan, mortgage, or credit card—or leave you with only high-interest-rate options. A high score, meanwhile, may give you access to the lowest rates available, which could save you money over time, especially for large loans, such as mortgages.

Consider this hypothetical example: Someone with a 750 credit score may qualify for a mortgage rate of 7.45% for a 30-year loan, while someone with a credit score of 650 might get a mortgage rate of 7.94%, based on rates reported on consumerfinance.gov for the state of Texas in August 2023. Assuming each borrows $400,000—roughly the average sales price in the second quarter of 2023, minus a 20% down payment—the person with the 750 credit score would pay about $50,000 less in interest over the life of their loan than the person with the 650 credit score.

Even if you don’t have immediate plans to borrow money, chances are that you may eventually. Some landlords also check your credit score before making decisions about renting apartments.

How are credit scores calculated?

Credit scores are calculated considering these factors:

• Any outstanding balances you owe and what percentage of your total credit limit this represents
• Your payment history, or how often you make on-time payments
• How far back your credit history stretches
• The number of recent applications for credit accounts you’ve made
• The types of credit accounts, like credit cards, mortgages, car loans, or student loans, in your name

There are 2 main credit score formulas, FICO^® and VantageScore^®. Each weighs the data in the above categories a little differently, though both prioritize the on-time payments category as the most important. For a full breakdown, check out our guide to how credit scores are calculated.

The personal data used in your credit score is provided by 3 primary credit reporting bureaus—Equifax, Experian, and TransUnion—which is where lenders report debt repayment information. Because different lenders may use different formulas and reporting agencies, your credit score may vary depending on where you check it.

Credit score ranges

Though both FICO^® and VantageScore^® provide credit scores ranging from 300 to 850, the way they categorize groups of scores is slightly different. FICO scores are grouped like this:

• 300–579: Poor
• 580–669: Fair
• 670–739: Good
• 740–799: Very Good
• 800–850: Exceptional

VantageScore, meanwhile, has slightly different ranges:

• 300–499: Very Poor
• 500–600: Poor
• 601–660: Fair
• 661–780: Good
• 781–850: Excellent

The category your score falls into, as well as how high or low your score is within a category, determines the kinds of loans and rates you may qualify for.

What’s the average credit score?

In 2022, the average FICO score was 714, according to Experian data. The average VantageScore was 702, as of June 2023. Under both scoring systems, the average credit score is considered Good.

How to improve your credit score

If you’re hoping to raise your credit score, follow these steps:

• Pay bills on time. Even one missed or late payment reported to the credit bureaus could harm your credit score, and if you’re delinquent long enough to require notice from a collection agency, it will stay on your report for 7 years. Since this is the most important component of a credit score, consider putting this habit on autopilot by setting up automatic bill pay.
• Keep credit card balances low. Just because you have access to a certain amount of credit doesn’t mean you should use all of it. Generally, the lower your credit utilization rate—or how much of your available credit you are using—the better your score may be. One guideline is to keep your utilization rate below 30%. For example, that means that if you have a credit card with a limit of $1,000, you will ideally carry a balance of no more than $300. If you are unable to stay below 30% each month, you might consider paying off your balances mid-month or even requesting a larger credit limit to keep the percentage of available credit you use low.
• Don’t close old credit cards. Holding on to older cards, even if you don’t regularly use them, can be helpful in maintaining a long credit history. Be sure to check if these cards charge annual fees, though. If they do, you may need to weigh the pros and cons of keeping them open. You may be able to downgrade to a fee-free card by the same issuer.
• Look out for errors on your credit report. Typically you can request a free copy of your credit report from each of the 3 major credit bureaus once per year at www.annualcreditreport.com. (Through the end of 2023, you can get these reports weekly.) Keeping an eye on the information on your credit reports can help you spot errors, like if someone has fraudulently opened a card in your name. Disputing mistakes to the credit bureaus can help raise your score.

For more credit tips, check out our guide to raising your credit score.

How to check your credit score

You can check your credit score in many places—your credit card company, for instance, may include your most recent score on your bill statements or on its website or app. Look at whether a company is providing your FICO or VantageScore. While these are often similar, they can vary and if you are using your credit score to estimate what kinds of interest rates you might be eligible for, you may want to make sure the one you’re tracking is the same one your lender of choice is using too.