How Credit Scores Work

 March 25, 2020
How Student Loan Hero Gets Paid

How Student Loan Hero Gets Paid

Student Loan Hero is compensated by companies on this site and this compensation may impact how and where offers appear on this site (such as the order). Student Loan Hero does not include all lenders, savings products, or loan options available in the marketplace.

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Student Loan Hero is an advertising-supported comparison service. The site features products from our partners as well as institutions which are not advertising partners. While we make an effort to include the best deals available to the general public, we make no warranty that such information represents all available products.

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been reviewed, commissioned or otherwise endorsed by any of our network partners.

how do credit scores work

We’ve got your back! Student Loan Hero is a completely free website 100% focused on helping student loan borrowers get the answers they need. Read more

How do we make money? It’s actually pretty simple. If you choose to check out and become a customer of any of the loan providers featured on our site, we get compensated for sending you their way. This helps pay for our amazing staff of writers (many of which are paying back student loans of their own!).

Bottom line: We’re here for you. So please learn all you can, email us with any questions, and feel free to visit or not visit any of the loan providers on our site. Read less

While you know it’s important to maintain a good credit score, you might be wondering, “How do credit scores work?” Well, your credit score is based on a number of factors, including your amounts owed, history of debt repayment and length of credit history.

The following is our list of everything you need to know about what a credit score is, why you should care about yours and how you can use it to achieve your financial goals. Let’s get to it.

What is a credit score?
How do credit scores work?
What types of credit scores are there?
How to improve your credit score
Credit scores and credit reports are not the same
Don’t go into debt to improve your credit score

What is a credit score?

Lenders developed credit scores to help them understand the level of risk certain borrowers might present. They start by measuring a certain number of credit criteria (detailed below), and from there, borrowers are given a three-digit score between 300 and 850.

But what you might not know is that we all have more than one credit score. There are a few different scoring models, such as FICO® and Vantage 3.0. While these scores are based on similar factors, they probably won’t be exactly the same.

So when you’re building your credit, it’s important to focus on the range that your credit score falls into (e.g., fair, good, or excellent), rather than the specific credit score itself.

How do credit scores work?

There are two major credit scores, FICO and VantageScore. And there are five factors that make up how these scores are calculated. Some factors have greater weight than others.

Here’s the breakdown of the FICO score, as seen in MyFico:

FICO score breakdown,

1. Payment history

Payment history is the most influential factor of your credit score at 35%. It’s also the easiest to control. Simply make your payments on time for all of your bills and you’ll score highly in this area.

2. Amounts owed

Amounts owed clocks in at the second most important factor of your credit score at 30%.

This is also known as credit utilization or your credit-to-debt ratio. You can factor this ratio by adding up the amount due on all your revolving lines of credit. Then add up the amount of all of your credit limits and compare these two numbers.

For example, if you have two credit cards with a $500 limit on each and no other revolving lines of credit, then you have a total limit of $1,000. If you owe $50 on each credit card, then you have a $100 balance in total. This equals out to a 10% credit utilization ratio.

To score highly in this category, keep your ratio at 30% or below.

Note: There’s a persistent myth that you need to carry a balance over from month to month to have a good credit score. This is simply not true.

Since a lower credit utilization ratio equals a higher score, a zero balance is the best thing you can have. Why? Because it will give you a 0% credit utilization.

Lenders want to see you using your credit cards, but that doesn’t mean you have to carry a balance and pay interest on that to get a good score. So if you pay your balance off every month, you’ll stay out of credit card debt and improve your credit score at the same time.

3. Length of credit history

This next factor of your credit score is worth 15% and will improve as time goes on, as long as you don’t cancel your credit accounts.

That’s because this factor is length of credit history. Therefore, keeping your accounts open demonstrates you can maintain a good length of credit history.

Credit card issuers do sometimes close a credit card account due to lack of use. So you may need to periodically use old cards for small purchases and pay them off before the interest hits. That way, you can keep your accounts open and contribute to this portion of your credit score.

4. Credit mix

Credit mix refers to the types of credit you have, such as lines of credit and installment loans. This mix is worth 10% of your score.

Ultimately, you’ll score better if you have more than one type of credit. But it’s not worth enough of your score to take a loan out that you don’t need.

On the flip side, if you’ve been struggling with student loans and have a credit card, then your student loans can do something good for you. They’ll contribute to your credit mix.

5. New credit

Finally, there’s new credit, also worth 10% of your credit score.

This factor, though not worth a ton, can cause quite a bit of confusion for consumers. That’s because many fear that having too many inquiries on their credit score will hurt this factor.

Here’s the easy way to remember the rules on this one. If you’re shopping around for new credit, do it quickly and always apply for the same amount.

For example, if lenders see that you’ve applied for three home loans for $250,000 within two weeks, it will be clear to them that you’re rate shopping.

But if you apply for a home loan for $250,000, a credit card and an installment loan of $10,000, then it could look like you’re overextended. And if you’re overextended, you might be a risk.

Therefore, just shop for what you need and don’t stretch out the new credit applying process days for more than 45 days. That way, you won’t take a hit on this portion of your credit score.

What types of credit scores are there?

As mentioned above, there are many credit scores out there. But there are two major types you’ll want to focus on, FICO and VantageScore.

There are multiple models of each, and lenders may use different models based on the product they’re financing (i.e. mortgages versus auto loans).

Because of this, everyone has many credit scores. But if you follow the range your score falls into, then you’re in good shape.

FICO credit score ranges

FICO has five credit score ranges as described by Experian:

  • 300-579 “Very Poor”
  • 580-669 “Fair”
  • 670-739 “Good”
  • 740-799 “Very Good”
  • 800-850 “Exceptional”

VantageScore credit score ranges

VantageScore has five credit score ranges as described by Experian:

  • 300-499 “Very Poor”
  • 500-600 “Poor”
  • 601-660 “Fair”
  • 661-780 “Good”
  • 781-850 “Excellent”

What the credit score ranges mean to you

These range descriptions are pretty self-explanatory. In short, the higher your score, the easier it will be to obtain new credit.

But, borrowing money isn’t the only thing your credit score can affect. It can also affect your future employment opportunities and approval for things like an apartment lease or insurance.

Whether or not you want to finance purchases, you need to be aware of your credit score. Work to get it as high as possible so that it never stands in your way.

How to improve your credit score

Once you know how credit scores work, there are a few different things you can do to get your credit score as high as possible. However, your approach will all depend on your current credit score range.

If you’re new to credit…

Looking to establish credit for the first time? If you take the following steps, you should see an uptick in your score in about six months to a year:

Get a credit card.

It’s usually not difficult to get a credit card for the first time, though the credit limit will probably be low. However, if you’re new to the U.S. or have trouble getting a credit card, you can opt for a secured credit card instead.

Get a secured credit card if you can’t get a regular credit card.

A secured credit card is one in which you put down a down payment. This acts as a security deposit that you get back if you close the account or are upgraded to a traditional (unsecured) credit card – so long as your balance is paid off.

Many companies who offer secured credit cards regular review accounts to see if they might be eligible for an upgrade. That makes this a great option to help you establish credit.

Make all of your payments on time.

Why do you need credit to build credit? Because it’s one of the best ways to show lenders that you can handle credit responsibly.

And the best way to do that is to make your payments on time every month and pay your balances as soon as you can so you can also avoid going into debt.

Try alternative credit reporting.

You can also look into alternative credit-building tools like RentalKharma. They verify that you have made your rental payments on-time, then report it to TransUnion for inclusion on your credit report.

If you’re trying to improve bad credit…

If you want to improve your credit score and avoid having it fall into one of the lower ranges, there are a few steps you can take.

  • Pay off delinquent bills or accounts: accounts that have gone to collections stay on your credit for years. That’s why you’ll want to take care of them as soon as you’re able.
  • Negotiate a payment plan with your creditors: if you’re unable to pay off delinquent accounts, reach out to your creditors and explain your situation.
  • Get a secured credit card to rebuild your credit: as stated above, a secured credit card can help demonstrate you can responsibly handle credit.
  • Make sure there are no errors on your credit report: if there are any errors, learn how to dispute credit report errors ASAP so you can get them off your report.

If you want to improve or maintain good credit…

Let’s say your credit score isn’t in bad shape but you want to increase it. Here are some tips to help:

  • Check your credit report annually: and dispute any errors that you come across quickly.
  • Apply for a credit limit increase: doing so will decrease your credit utilization, which, remember, makes up 30% of your score.
  • Pay all your bills in full and on time: this will continue to demonstrate that you can handle credit responsibly and help you avoid acquiring debt in the process.
  • Pay off your debts: by keeping a low-to-zero balance on your debts you maintain a great credit history for lenders to view.

Some may worry that increasing your credit limits is counterintuitive to paying off debt.

Just remember that if you increase your credit limit, you shouldn’t increase your balance. Otherwise, you’ve done nothing to improve your credit utilization or your credit score.

Credit scores and credit reports are not the same

Before we dive deeper into how credit scores work, it’s important to understand that credit scores and credit reports are not the same. A credit report is a listing of your financial accounts and the details thereof.

According to MyFico, this includes:

  • What types of credit you use.
  • The length of time your accounts have been open.
  • Whether you’ve paid your bills on time.
  • Your address.
  • Whether you’ve been sued or arrested, or have filed for bankruptcy.

A credit score, on the other hand, is simply a numerical illustration of your creditworthiness. While the score is based on information on your credit report, your credit score is not listed on your credit report.

Therefore, consider these to be two separate things, but working on one will improve the other. For example, you can order your credit report at and check for any late payments or collections accounts that could be dragging down your score.

At the same time, you can use a free credit monitoring service, such as My LendingTree or your own credit card, to review your score and ensure that your efforts are helping build it into the good or excellent range.

Don’t go into debt to improve your credit score

There are a lot of myths on how credit scores work and how to improve them, some of which can be disastrous to your finances. All you have to remember is that whatever keeps you financially sound will help you improve your credit.

In other words, if you want to appear to be a responsible borrower, use credit. But, pay it off every month so you don’t go into debt.

And if that’s not possible (which it may not be for a mortgage, auto loan or student loan), then pay it off as soon as you can.

Most importantly, always pay your bills on time. And don’t co-sign on accounts you can’t afford to pay off should the borrower default.

In the end, if any credit scoring advice coming your way promises a quick fix or seems too good to be true, it probably is. Building a good credit score takes time, but in the end, the doors it opens for you will be well worth the effort.

Rebecca Safier contributed to this report.

Interested in a personal loan?

Here are the top personal loan lenders of 2022!
LenderAPR RangeLoan Amount 
7.99% – 23.43%1$5,000 - $100,000

Visit SoFi

4.37% – 35.99%$1,000 - $50,000

Visit Upstart

7.46% – 35.97%*$1,000 - $50,000

Visit Upgrade

99.00% – 199.00%2$500 - $4,000

Visit OppLoans

5.99% – 24.99%3$5,000 - $40,000

Visit Happy Money

7.99% – 20.88%4$5,000 - $50,000

Visit Citizens

7.99% – 35.99%5$2,000 - $36,500

Visit LendingPoint

10.68% – 35.89%6$1,000 - $40,000

Visit LendingClub

9.95% – 35.99%7$2,000 - $35,000

Visit Avant

1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

Fixed rates from 7.99% APR to 23.43% APR APR reflect the 0.25% autopay discount and a 0.25% direct deposit discount. SoFi rate ranges are current as of 8/22/22 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. Lowest rates reserved for the most creditworthy borrowers. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, income, and other factors. See APR examples and terms. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

2 Includes AutoPay discount. Important Disclosures for Opploans.

Opploans Disclosures

Direct Deposit required for payroll.

Opploans currently operates in these states: . *Approval may take longer if additional verification documents are requested. Not all loan requests are approved. Approval and loan terms vary based on credit determination and state law. Applications processed and approved before 7:30 p.m. ET Monday-Friday are typically funded the next business day.

  1. To qualify, a borrower must (i) be a U.S. citizen or permanent resident; (ii) reside in a state where OppLoans operates; (iii) have direct deposit; (iv) meet income requirements; (v) be 18 years of age (19 in Alabama); and, (vi) meet verification standards.
  2. NV Residents: The use of high-interest loans services should be used for short-term financial needs only and not as a long-term financial solution. Customers with credit difficulties should seek credit counseling before entering into any loan transaction.

  3. OppLoans performs no credit checks through the three major credit bureaus Experian, Equifax, or TransUnion. Applicants’ credit scores are provided by Clarity Services, Inc., a credit reporting agency.

  4. Based on customer service ratings on Google and Facebook. Testimonials reflect the individual’s opinion and may not be illustrative of all individual experiences with OppLoans. Check loan reviews.

  5. Rates and terms vary by state.

3 Includes AutoPay discount. Important Disclosures for Happy Money.

Happy Money Disclosures

  1. All loans are subject to credit review and approval. Your actual rate depends upon credit score, loan amount, loan term, credit usage and history. Currently loans are not offered in: MA, MS, NE, NV, OH, and WV.

4 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Rates and offer subject to change. All accounts, loans and services subject to individual approval.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

5 Important Disclosures for LendingPoint.

LendingPoint Disclosures

Applications submitted on this website may be funded by one of several lenders, including: FinWise Bank, a Utah-chartered bank, Member FDIC; Coastal Community Bank, Member FDIC; Midland States Bank, Member FDIC; and LendingPoint, a licensed lender in certain states. Loan approval is not guaranteed. Actual loan offers and loan amounts, terms and annual percentage rates (“APR”) may vary based upon LendingPoint’s proprietary scoring and underwriting system’s review of your credit, financial condition, other factors, and supporting documents or information you provide. Origination or other fees from 0% to 7% may apply depending upon your state of residence. Upon final underwriting approval to fund a loan, said funds are often sent via ACH the next non-holiday business day. Loans are offered from $2,000 to $36,500, at rates ranging from 7.99% to 35.99% APR, with terms from 24 to 72 months. Minimum loan amounts apply in Georgia, $3,500; Colorado, $3,001; and Hawaii, $1,500. For a well-qualified customer, a $10,000 loan for a period of 48 months with an APR of 24.34% and origination fee of 7% will have a payment of $327.89 per month. (Actual terms and rate depend on credit history, income, and other factors.) The $15,575.04 total amount due under the loan terms provided as an example in this disclaimer includes the origination fee financed in addition to the loan amount. Customers may have the option to deduct the origination fee from the disbursed loan amount if desired. If the origination fee is added to the financed amount, interest is charged on the full principal amount. The total amount due is the total amount of the loan you will have paid after you have made all payments as scheduled.

6 Important Disclosures for LendingClub.

LendingClub Disclosures

All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage and history. The APR ranges from 10.68% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 9.56% and a 5.00% origination fee of $300 for an APR of 13.11%. In this example, you will receive $5,700 and will make 36 monthly payments of $192.37. The total amount repayable will be $6,925.32. Your APR will be determined based on your credit at time of application. The origination fee ranges from 2% to 6% (average is 4.86% as of 7/1/2019 – 9/30/2019). In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,001 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the website. All loans via LendingClub have a minimum repayment term of 36 months or longer.

7 Important Disclosures for Avant.

Avant Disclosures

*If approved, the actual loan terms that a customer qualifies for may vary based on credit determination, state law, and other factors. Minimum loan amounts vary by state.

**Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33.

Based on the responses from 7,302 customers in a survey of 140,258 newly funded customers, conducted from August 1, 2018 – August 1, 2019, 95.11% of customers stated that they were either extremely satisfied or satisfied with Avant. 4/5 Customers would recommend us. Avant branded credit products are issued by WebBank, member FDIC.

* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

Personal loans made through Upgrade feature Annual Percentage Rates (APRs) of 7.46%-35.97%. All personal loans have a 1.85% to 8% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. Loans feature repayment terms of 24 to 84 months. For example, if you receive a $10,000 loan with a 36-month term and a 17.59% APR (which includes a 13.94% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $341.48. Over the life of the loan, your payments would total $12,293.46. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Personal loans issued by Upgrade’s bank partners. Information on Upgrade’s bank partners can be found at .