Imagine trying to lose a few pounds without ever stepping on the scale or trying to cut your cholesterol without ever getting it checked. Tens of millions of Americans are taking a similarly blind approach to their money. Everyone wants their finances to be in good shape, but less than half of all Americans even know their credit score. That's not good — a bad credit score can mean a high-interest loan that costs you thousands and thousands of dollars over the course of a lifetime.
But it's not just laziness. Private companies own the math behind calculating credit scores, so often you can't get your score without paying for it (and there's no way you can calculate it on your own). The scoring system doesn't always make sense, either — even seemingly responsible decisions can dock your score. To learn more, read our nine questions about what goes into a credit score.
1) What is a credit score?
A credit score is an attempt to boil down your entire credit history into one three-digit number. This is different from a credit report, which is essentially a rundown of your various accounts and loans and payment histories. Your credit score is an attempt to boil that all down to one number. A credit score is one of the key things that lenders look at when determining whether to loan you money and what the terms of that loan will be.
You'll see commercials on TV and YouTube videos that advertise where you can find your (singular) credit score, but that question is misleading, in the sense that there are lots and lots of credit scores out there — hundreds, according to Rod Griffin, director of consumer education at Experian. The main one that people reference is the FICO score, a type of score created by the Fair Isaac Corporation. According to FICO, 90 of the 100 biggest financial institutions use FICO scores.
A FICO score falls between 300 and 850 points. Why such an odd range? Because of the way the scores used to be calculated, writes a FICO spokesman in an email:
In the early days of the company, our calling card was building custom application screening scorecards. These scorecards, typically ranged from 100 to 300. When building the FICO Score, we wanted a score range that would differentiate it from our typical application screening card. So to avoid confusion with those existing original score ranges, the FICO Score range was established to be 300 to 850.
To be clear, there are lots of FICO scores — as Bankrate.com reports, there are nearly 60, and soon will be more than that. The three big credit reporting bureaus — Equifax, TransUnion, and Experian — each have a FICO score, but they also all have their own scores, which are known as "educational scores."
Your FICO score, as opposed to any other scores that different sites might try to sell you, is generally agreed to be the most important one to keep your eye on. The three credit bureaus' scores are formatted the same way as the FICO, and it's unlikely — but not entirely uncommon — for different scores to say meaningfully different things about a consumer. In a 2012 report, the CFPB found that around 14 percent of consumers had FICO and educational scores that were two or more deciles apart from each other — that is, their FICO scores might have been in the top 30 percent, but their TransUnion scores might have been only in the top 50 percent.
2) So wait. I have to pay to see my credit score?
That depends on which one. There are ways to see a score for free — on websites like Credit Karma and Credit Sesame, for example, you can see some credit scores. To see a FICO score, though, you may have to pay. FICO does have a partnership with some companies, like Barclay's and Discover Card, which allows those companies to provide it for free.
Unlike many other personal numbers you might want to keep close track of, your credit score is calculated and maintained by companies with their own proprietary formulas, and therefore they can charge you to see it.
That said, you don't have to live and die by your credit score itself. You can easily see the information that is used to calculate that score. By law, you can check your credit report for free once a year, and you should totally take advantage of that. You can do it at AnnualCreditReport.com, the site authorized to give you that annual report. There are other credit websites that offer free credit reports and even some free scores, but the FTC cautions that you should look closely at the fine print on these sites.
"Other websites that claim to offer 'free credit reports,' 'free credit scores,' or 'free credit monitoring' are not part of the legally mandated free annual credit report program. In some cases, the "free" product comes with strings attached," they write.
It won't give you your FICO number, but a glance at your report can at least give you a sense of whether your score is good (no missed payments, low debt levels) or bad (many missed payments, maxed-out cards). Not only that, but it can show you if lenders are operating on bad information — by one 2013 FTC estimate, around 1 in 20 people have mistakes on their credit reports. (If you do spot a mistake, make sure to dispute it.)
3) How much does my credit score matter?
It matters a lot — a higher credit score means you can get loans more easily and for lower interest rates. So that means that over time, a lower credit score can cost you thousands — or even tens of thousands — of dollars. There are differing opinions on this, but a good score is generally considered something over 700, and a great score is something over 750.
FICO has a calculator that illustrates this point well. A $200,000 30-year fixed mortgage yields an average interest rate of 3.6 percent for the highest-score people but of 5.2 percent for people at the low end. The difference in monthly payments here is almost $190, and the total interest paid between these two people differs by a whopping $70,000.
(In addition, bad credit can affect the rest of your life, as many employers look at your credit as a factor in hiring — but only your credit report, not your score. In other words, being in poor financial circumstances can get in the way of getting a job, which by the way tends to improve your financial circumstances.)
4) How do they calculate my score?
Credit bureaus and FICO tend to be secretive about their particular mathematical formulae, but this is FICO's breakdown of what goes into its score.
Clearly the biggest part of that is how current you've been on your payments. And it's not just credit cards; your credit score takes in information on the other types of credit you may have, from auto loans to student loans to mortgages.
Though they won't say exactly how they add it together, FICO has provided some information on how some common missteps can cut into your score. The higher your score, the more a mistake can hurt you, points-wise. A maxed-out card can cut a high-scoring person by 25 to 45 points, but someone with a lower baseline score will only be hurt by 10 to 30 points.
But it's also how much credit you have and are using. This is called the credit utilization ratio — the percent of credit you have that you use. If you have $9,000 in credit card debt and a $20,000 credit limit, that will pull your score down less than $9,000 in debt and a $10,000 limit would. In fact, it's not at all the amount of debt you have that factors into this, according to FICO; just that percentage. Maxing out your cards, in other words, will hurt your credit score even if you pay the bills on time.
5) Is it true that checking my score brings it down?
No. This is one of the biggest myths out there. Checking your credit score does not make it go down. In the credit industry, there are two types of inquiries: "soft" and "hard" inquiries. You or an employer checking into your credit report are soft inquiries. A bank or credit card company checking into your credit score is a hard inquiry. Those hard inquiries can lower your score, but generally only by a small amount and for a short period of time. The reason is that if you apply for a few loans or cards at once, the lenders will want to know about that potential new debt.
6) I need a break. Are there any good songs about maintaining your credit score?
Beyonce has the answer: Pay your bills. And don't let any scrubs run them up.
7) How do I bump up my credit score?
The biggest tip isn't anything sexy: make payments on all your loans on time. In addition, try to rein in your credit card balance. Thirty percent of your credit limit is a good level to aim for, according to one FICO expert.
"If you're using less than that, that's better, but 30 percent is typically what we recommend," says Anthony Sprauve, senior consumer credit specialist at FICO.
And since credit utilization ratios matter, one way to boost your score is to get more credit (but — and this is key — not to use too much of it). Getting a new card, and therefore a higher total credit limit, can boost your score. Likewise, don't necessarily shut down your cards once you pay off the balance.
But there's a line to walk. Opening a new card can be good for your score, but not if you can't handle having all that credit without using it. And vice versa: closing a card can be bad for your score, but in the long run if it reins you in, it might be the better decision anyway. And either way, if you're planning on applying for a home or auto loan in the near future, don't take any steps that could unnecessarily dock your score.
"Don't let your credit score drive a financial decision, but don't make that decision in the midst of applying for more credit," says Griffin.
8) Why do credit scores even exist?
Credit reporting has been around since the start of the 20th century, when merchants traded financial information with each other about their customers, as PBS reports. Then credit bureaus formed to gather and disseminate that information. But there wasn't a very good standard way of describing people's credit.
In practice, banks made lending decisions based on guesswork and instinct. That wasn't very reliable, and also can lead to discrimination. Fair Isaac attempted to make credit scores happen for decades, starting in the 1950s, but it wasn't until the late 1980s that it successfully developed a standard score that lenders found useful. The original formula has been tweaked over time in several ways. Just this year it changed its system so that future scores will ignore medical debt and stop penalizing people for debts that went into collection once the debts have been paid off.
9) Doesn't this all work against people who don't want credit cards or who don't have much financial access?
Yes. If you never, ever have a credit card or take out a loan and pay for everything in your entire life using a debit card or checking account or cash, you are not really developing credit. (Though there are still ways to have a credit score — if you were an authorized user on someone else's card, for example, or if you've had a cell phone bill go into collections.)
Likewise, if you don't have access to banking services, building credit can be near impossible. Fortunately, there are some avenues to build credit even without having a card or taking out a home loan. Savings circles are one way that some low-income and immigrant communities save, and some institutions have started reporting these to credit-reporting bureaus, in turn allowing people to build credit via these formerly informal arrangements.
Update: This story was updated on November 20, 2014, to include comment from FICO about why its score range is 300 to 850.
Corrections: This story was corrected on November 21, 2014 because an earlier version mischaracterized the differences between FICO and educational scores. The answer to #5 was changed on June 17, 2016 to reflect the fact that employer credit checks involve credit reports, not scores.