Your Ultimate Guide to Understanding How Credit Scores Work

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

Editorial Note: This content is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by the financial institution.

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

You always hear how important it is to know your credit score and maintain a good one. But with so much information out there, you’re probably wondering “how do credit scores work?” and don’t know where to start.

The following is everything you need to know about credit scores, why you should care about them, and how you can use them to reach your financial dreams. Let’s get to it.

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 that borrowers are given a three-digit score.

A lot of people try to strive for the “perfect” credit score. They assume that’s a goal that can unlock all of their financial wishes. But this is a pointless endeavor.

That’s because what many of those same people don’t know is that we all have more than one credit score. That’s why it’s more helpful to focus on the range that your credit score falls into rather than the credit score itself.

However, before we get to that, 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.

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. However, what affects your credit score is not always valued equally.

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

what affects your credit score

FICO score breakdown,

1. Payment history

Payment history is the most influential factor of your credit score at 35 percent. 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 percent.

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 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 percent credit utilization ratio.

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

Note: you might stumble on a “fact” stating 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 zero percent 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 percent 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 ten percent 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 percent 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 day. 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:

  • 300-549 “Very Poor”
  • 550-649 “Poor”
  • 650-699 “Fair”
  • 700-749 “Good”
  • 750-850 “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

There are a few different things you can do to get your credit score as high as possible, but they’ll depend on your current 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 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 is 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 the best way 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 will 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 percent of your score.
  • Pay all your bills in full and on time: this will continue to demonstrate that you can handle credit responsible, 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.

Don’t go into debt to improve credit score

There are a lot of myths on how to improve credit scores, 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.

Interested in a personal loan?

Here are the top personal loan lenders of 2019!
LenderAPR RangeLoan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Fixed rates from 5.990% APR to 16.240% APR (with AutoPay). Variable rates from 5.74% APR to 14.700% APR (with AutoPay). SoFi rate ranges are current as of March 18, 2019 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. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. 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, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.74% APR assumes current 1-month LIBOR rate of 2.43% plus 4.28% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. 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. To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.
    See Consumer Licenses.
  3. Minimum Credit Score: Not all applicants who meet SoFi’s minimum credit score requirements are approved for a personal loan. In addition to meeting SoFi’s minimum eligibility criteria, applicants must also meet other credit and underwriting requirements to qualify.
  4. SoFi Personal Loans are not available to residents of MS. Maximum interest rate on loans for residents of AK and WY is 9.99% APR, for residents of IL with loans over $40,000 is 8.99% APR, for residents of TX is 9.99% APR on terms greater than 5 years, for residents of CO, CT, HI, VA, SC is 11.99% APR, and for residents of ME is 12.24% APR. Personal loans not available to residents of MI who already have a student loan with SoFi. Personal Loans minimum loan amount is $5,000. Residents of AZ, MA, and NH have a minimum loan amount of $10,001. Residents of KY have a minimum loan amount of $15,001. Residents of PA have a minimum loan amount of $25,001. Variable rates not available to residents of AK, TX, VA, WY, or for residents of IL for loans greater than $40,000.
  5. If you lose your job through no fault of your own, you may apply for Unemployment Protection. SoFi will suspend your monthly SoFi loan payments and provide job placement assistance during your forbearance period. Interest will continue to accrue and will be added to your principal balance at the end of each forbearance period, to the extent permitted by applicable law. Benefits are offered in three month increments, and capped at 12 months, in aggregate, over the life of the loan. To be eligible for this assistance you must provide proof that you have applied for and are eligible for unemployment compensation, and you must actively work with our Career Advisory Group to look for new employment. If the loan is co-signed the unemployment protection applies where both the borrower and cosigner lose their job and meet conditions.
  6. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (

2 Includes AutoPay discount. Important Disclosures for Payoff.

Payoff 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.

3 Important Disclosures for FreedomPlus.

FreedomPlus Disclosures

  1. All loans available through are made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Eligibility for a loan is not guaranteed. Loans are not available to residents of all states – please call a FreedomPlus representative for further details. The following limitations, in addition to others, shall apply: FreedomPlus does not arrange loans in: (i) Arizona under $10,500; (ii) Massachusetts under $6,500, (iii) Ohio under $5,500, and (iv) Georgia under $3,500. Repayment periods range from 24 to 60 months. The range of APRs on loans made available through FreedomPlus is 5.99% to a maximum of 29.99%. APR. The APR calculation includes all applicable fees, including the loan origination fee. For Example, a four year $20,000 loan with an interest rate of 15.49% and corresponding APR of 18.34% would have an estimated monthly payment of $561.60 and a total cost payable of $7,948.13. To qualify for a 5.99% APR loan, a borrower will need excellent credit on a loan for an amount less than $12,000.00, and with a term equal to 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to directly pay off qualifying existing debt; or showing proof of sufficient retirement savings, could help you also qualify for the lowest rate available.

4 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Fixed interest rates from 6.79% – 20.89% (6.79% – 20.89% APR) based on applicable terms. Lowest rates range from 5.99%- 18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  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

  • 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 6% may apply depending upon your state of residence. Upon LendingPoint’s final underwriting approval to fund a loan, said funds are often sent via ACH the next non-holiday business day. LendingPoint makes loan offers from $2,000 to $25,000, at rates ranging from a low of 9.99% APR to a high of 35.99% APR, with terms from 24 to 48 months. The loan offer(s) shown reflect a 28 day payment cycle which is being offered as a courtesy as many of our customers are paid on a biweekly schedule and thus this may better align the loan payment dates with your actual income receipt schedule.

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 & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 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. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.

†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at

**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.

7 Important Disclosures for Earnest.

Earnest Disclosures

  1. Earnest does not lend in Alabama, Delaware, Kentucky, Nevada, or Rhode Island.

8 Important Disclosures for Avant.

Avant Disclosures

* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.

** 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

* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

* Your loan terms are not guaranteed and are subject to our verification and review process. You may be asked to provide additional documents to enable us to verify your income and your identity. This rate includes an Autopay APR reduction of 0.5%. By enrolling in Autopay your payments will be automatically deducted from you bank account. Selecting Autopay is optional. Annual Percentage Rate is inclusive of a loan origination fee, which is deducted from the loan proceeds. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. All loans made by WebBank, member FDIC. Please refer to Upgrade’s Terms of Use and Borrower Agreement for all terms, conditions and requirements.

** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.

5.74% – 16.24%1$5,000 - $100,000

Visit SoFi

7.46% – 35.99%$1,000 - $50,000

Visit Upstart

7.99% – 35.89%*$1,000 - $50,000

Visit Upgrade

5.99% – 24.99%2$5,000 - $35,000

Visit Payoff

5.99% – 29.99%3$7,500 - $40,000

Visit FreedomPlus

6.79% – 20.89%4$5,000 - $50,000

Visit Citizens

9.99% – 35.99%5$2,000 - $25,000

Visit LendingPoint

6.95% – 35.89%6$1,000 - $40,000

Visit LendingClub

6.99% – 18.24%7$5,000 - $75,000

Visit Earnest

9.95% – 35.99%8$2,000 - $35,000

Visit Avant

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

You're on your way...

We'll take you to where you'll be able to fill out one form to get multiple personal loan offers, based on your creditworthiness.