Key Takeaways:
- Your credit score is calculated using certain information in your credit report.
- Your credit score can change as information is updated, added or removed from your credit report.
- A good credit score can help your chances of being approved for credit products and may allow you to secure better terms, like lower interest rates.
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Knowing the basics about credit reports and credit scores can help you develop smart credit habits and make effective decisions for your financial future. Over time, these good credit habits and decisions should have a positive impact on your credit score. Healthy credit can help you take advantage of the credit opportunities you desire.
What is a credit score?
Your credit score is a three-digit number meant to reflect the risk you could pose to a lender when you borrow money. It offers a quick glance at your credit health and history of paying back your debts. You can think of it as a snapshot of your risk level based on your credit history at a specific moment in time.
There are different credit scoring models
When checking your credit scores, you may notice they are slightly different depending on who provided your score. This is because there are different scoring models. A bank or lender may use a different model than the one used when you view your score from TransUnion. When you get a credit score from TransUnion, it’s a VantageScore® 3.0 credit score. Although scoring models tend to look at similar factors, they may weigh those factors differently, which may account for some variation in your credit scores.
How is your credit score calculated?
Credit scores are calculated using information in your credit report. Information is added or changed from your credit report when companies, such as lenders and banks, provide updates to your account information to the credit reporting agencies. Information is also removed from your credit report after a specific amount of time. For instance, accounts closed in good standing will remain on your credit report for up to 10 years, while negative information, like missed payments or collections, will fall off your credit report after seven years.
Popular scoring models provide credit scores ranging from 300 to 850. Personal information, like your race and gender, doesn’t have an impact on your credit score. Instead, credit scoring models use information pertinent to how you handle credit to calculate your score.
Credit Score Factors
Here are the factors that make up a VantageScore® 3.0 credit score and their relative impact:
- Payment history
- Credit usage
- Credit depth
- Recent credit
Here are the factors that make up a VantageScore® 3.0 credit score:
- Payment history – This factor looks at how good you are at making payments on time.
- Credit usage – Credit usage considers your credit utilization, your total balances and the available credit you have.
- Credit depth – Credit depth reflects the length of your credit history and the different types of accounts you have.
- Recent credit – This minor credit factor considers recent credit applications.
As stated above, scoring models tend to have similar credit score factors, but may weigh them differently. For example, a VantageScore® 3.0 credit score puts the most emphasis on payment history. Other models may prioritize other factors.
For the VantageScore® 3.0 model, a good credit score falls in the range of 661 to 780. When making credit score goals, it may help to shoot for a range, instead of one specific score. Your credit score may change from month to month, so it can be tough to land on a particular score.
Why your credit scores change
Your credit scores can change as your lenders provide updated information to the credit reporting agencies, which then appears on your credit report. If information in your credit report changes based on what lenders provide and it’s related to one of the credit scoring factors, your scores may reflect that. Here are some common reasons your credit score may change:
| Reason for change in your score | What it means | How it can affect your score | What you can do |
|---|---|---|---|
| Credit card balance change | Your credit card balance goes up or down | Higher balances may lower your score | Try to keep credit utilization under 30%; lower is better |
| New credit applications | You apply for a new credit card or loan | A hard inquiry may cause a small, temporary score drop | Only apply for credit when needed |
| Missed or late payments | You miss a payment or pay late | Can significantly lower your score; payment history is highly influential | Set up reminders or autopay to stay on track |
| Closing out accounts | You or your lender closes a credit account | May reduce available credit and credit depth, which can impact your score | Consider keeping accounts open to maintain low utilization; keep older accounts to support credit depth |
These are some, but not all reasons, why your credit score can fluctuate. For instance, if you pay down credit card debt, it could help your score if it lowers how much of your available credit you’re using. Alternatively, if you made a big purchase using a credit card and that increased balance was updated on your credit report, it may have a negative impact on your credit score. Recent credit applications, a missed payment, and a closed account can all impact your credit score.
There are many reasons why your credit score can drop. The important thing to remember is that if your score changed, it means something in your report probably did as well. If you’re not sure why your score changed, check your credit reports to determine the cause.
Pro Tip:
Lenders tend to provide updates to credit reporting agencies once a month, so you may not see positive credit habits reflected in your credit report immediately.
Why is your credit score important?
Your credit score provides lenders with a snapshot of your credit health, which can help them make a lending decision. Companies may have different criteria for extending credit, so a score that may get you approved with one lender may not be the same for another. In general, the higher your score, the more likely you’ll be approved and get better terms on credit products, which can save you money over time. For major life decisions, like home buying, good credit can help you save significant money.
In some instances, like mortgages and auto loans, your credit score may not be the only thing lenders look at before offering you credit.
How to maintain healthy credit
It’s important to recognize that practicing healthy credit habits will help you no matter what credit scoring model is used. Understanding those key financial behaviors is essential.
Here are some smart habits to practice:
- Make all your payments on time.
- Keep your balances as low as you can.
- Open new accounts sparingly.
- Be mindful about closing longstanding accounts — their history may be reflecting positively in your score.
- Check your credit report regularly to ensure it is accurate.
As information is added to or removed from your credit reports, you may see some fluctuation in your credit score. Minor changes are common as your account information is updated. However, if you see a major drop, it is something you should investigate. Because your score reflects the information in your credit report, reviewing your credit reports should reveal the cause.
3 Tips for a Good Credit Score
- Make payments on time Pay at least the minimum due by the statement due date to avoid late payment marks on your credit report.
- Keep your balances low Aim to use less than 30% of your available credit on each card to maintain a healthy utilization ratio.
- Apply for credit sparingly Limit hard inquiries and new accounts to protect average account age and reduce risk signals.
Stay on top of your credit health
Monitoring your reports consistently is one of the most important credit habits. The more you read your reports, the more comfortable you’ll be with the information. This can make it easier to spot changes, even minor ones, which may impact your credit score. You can get your credit reports from TransUnion, Equifax and Experian for free weekly through AnnualCreditReport.com. If you notice something in your credit report you believe to be inaccurate or the result of fraud, you can dispute it.
It’s important to know that you can’t dispute your credit score since it’s based on the information in your report. However, if something in your credit report is inaccurate, you can dispute that information. Disputing inaccurate information ensures your credit report accurately reflects your credit history.
There are no quick fixes
When it comes to improving your credit health, remember to be patient — not just with your credit, but with yourself. Healthy credit isn’t built overnight, and mistakes can happen. Positive moves you make today may not be reflected in your report and scores immediately. But as those habits become routine, you’ll continue to build a credit history you can be proud of.
You can see additional credit report options from TransUnion, including daily refreshes of your TransUnion credit report and credit score and alert notifications of credit report changes, on TransUnion’s free credit report page.
