A credit score is a three-digit number (300-850) that represents your creditworthiness—your likelihood of repaying borrowed money on time. Lenders use credit scores to decide whether to approve loans and what interest rates to charge.
Score Ranges
- Excellent (750-850): Lowest interest rates, easiest approval
- Good (700-749): Favorable rates, minimal difficulty
- Fair (650-699): Higher rates, more scrutiny
- Poor (550-649): Significantly higher rates, limited options
- Very Poor (300-549): Highest rates or denial
What Determines Your Score
Credit scores are calculated from five factors:
- Payment history (35%): Did you pay on time? Late payments hurt significantly.
- Amounts owed (30%): How much debt do you carry vs. credit limits? (utilization ratio)
- Length of credit history (15%): How long has your credit file existed?
- New credit (10%): Recent hard inquiries and new accounts lower scores temporarily
- Credit mix (10%): Do you have different types of credit (cards, loans, mortgage)?
Real Example
Person A: Score 800
- 20-year credit history, zero late payments
- $50k income, $8k debt, 5% credit utilization
- Mortgage rate: 6.5% on $300k = $1,896/month
Person B: Score 650
- 5-year credit history, two late payments
- $50k income, $25k debt, 80% credit utilization
- Mortgage rate: 7.8% on $300k = $2,251/month
- Monthly difference: $355 = $127,800 over 30 years
A 150-point score difference costs $127,800 in extra interest.
Improving Your Score
- Pay all bills on time (35% of score)
- Reduce credit card balances below 30% of limits (30% of score)
- Don't close old accounts (15% of score)
- Space out new credit applications (10% of score)
- Build diverse credit mix if possible (10% of score)
Payment history and credit utilization alone account for 65% of your score, so focus there.
