Credit Scores: The Complete Guide

Published May 2021
Iphones displaying different credit scores

As the standardized measure of your creditworthiness, your credit score impacts your financial possibilities. Here’s the lowdown on credit scoring.

Key Points: 

  • Your credit score is a standardized measure of your creditworthiness.
  • A good credit score gives you access to loans with lower interest rates, generous rewards, and various financial perks.
  • A bad credit score limits your financial options and makes your life more difficult.
  • The three credit bureaus, Experian, TransUnion, and Equifax derive your credit score based on some variables such as your payment history and credit utilization ratio.
  • Lenders may use your credit score to determine whether to approve your credit application and what terms they attach to your approved loans.

Your credit score impacts your financial life in significant ways. This three-digit number determines whether you can access financial products and what credit terms will be offered to you. A good credit score opens the door to financial opportunities such as purchasing a car or home at reasonable rates. A poor credit score does the opposite, narrowing your financial opportunities considerably.  

Your credit score measures and sums up your creditworthiness through a standardized set of metrics. It uses several variables such as your credit history, credit utilization ratio, credit mix, credit appetite, etc. 

According to CNBC, around 1.6 percent of Americans have perfect credit scores. Many more have great or good scores. There are plenty of people, however, whose credit scores are fair or poor. Some do not even have a credit history and a credit score to go with it. 

How can you establish or improve your credit score? How do your credit scores work, and how do lenders use them? How do you maintain a good credit score? Here are some answers. 

How Credit Bureaus Calculate Your Credit Score 

The Fair Isaac Corporation (FICO) is a data analytics operation based in California. FICO does not calculate your credit score. It does, however, provide the software, and with it, the standardized methodology credit bureaus use to calculate your three-digit credit score. 

A competitor to FICO, VantageScore is another method of determining your credit score, based on a methodology that the three major credit bureaus, TransUnion, Equifax, and Experian created. 

How do you know whether your lender is looking at your FICO score or VantageScore? You don’t. Lenders can check your credit score with any of the three credit bureaus. Thus it is up to them whether they check your FICO or VantageScore. 

Your FICO Score 

FICO’s methodology uses your consumer credit report to calculate your credit score, weighing five different variables. 

Credit score factors

Your payment history accounts for 35 percent of your credit score. When you miss payments or make them late, you hurt your payment history. It even matters how late your payments are.

Your credit utilization ratio (CUR) accounts for 30 percent of your credit score. This variable is the ratio of your available credit and how much you owe.  The CUR offers an accurate picture of how well you can manage debt and credit. It should be under 30 percent.

Your credit history makes up 15 percent of your FICO score. The longer you make payments on time, the better manager of credit you presumably are.

Your credit mix describes the diversity of your credit portfolio, and it accounts for 10 percent of your credit score. Ideally, you will have a mix of secured credit items, such a car or home loan, and unsecured credit, such as credit cards. A diverse credit profile is proof that you are not abusing the credit score system and that you can handle several types of credit well.

Your credit history accounts for 10 percent of your credit score. From the perspective of lenders, applying for many new sources of credit over a short time is a sign of financial distress, and, thus, it can hurt your credit score. Conversely, having a credit card for many years improves your credit score. 

What counts as a good FICO score? Here’s the breakdown, according to Equifax:


Score Range

Credit Status
300-579 Your credit score is poor, and your financial options are few. Try to improve your score as soon as possible.


Your credit score is fair but leaves ample room for improvement.


Your credit score is good.


Your credit score is very good.


Your credit score is excellent. 850 is the perfect FICO score.


Since each bureau calculates your FICO score based on its own data, you have three FICO scores instead of a universal one. 

Your VantageScore 

VantageScore uses a methodology similar to FICO to calculate scores. Although its early versions used slightly different ranges for credit scoring, its latest one adopted a scale similar to FICO’s, encompassing the 300-850 range. 

Here are the components of your VantageScore and their approximate weights. 

  • Your credit utilization ratio, as determined by your balance, total credit usage, and total available credit, is the most influential part of your VantageScore.
  • Your credit mix is the second most influential component of your credit score. You have to have a healthy mix of installment- and revolving credit.
  • Your payment history is a moderately influential part of your credit score.
  • The new accounts that you have used to acquire new credit exert less influence on your credit score.
  • The factor with the least significant credit score impact is the age of your credit history. 

How It Works VantageScore


What constitutes a good VantageScore? 

Score Range

Credit Status


Everything in this range 


These scores are poor and in need of quick improvement.


These scores are considered fair but leave room for improvement.


These scores are good VantageScores.


These scores are excellent VantageScores, with 850 being the perfect score.

(Source: Experian)

Of the two credit score variants, FICO is the more popular, although VantageScore has been catching up lately. 

How Lenders Use Credit Scores 

When you request credit, your lender pulls your credit score from one of the three credit bureaus. Based on that score and other factors, your lender decides whether to take the chance of granting you some credit. 

A good credit score means that you are a good manager of credit and, as such, highly likely to repay your debt reliably and on time. You are a low-risk potential client for your lender. The lender may, therefore, afford to give you loans with attractive APRs and access to credit cards with generous rewards. 

A bad credit score tells your potential lender that you are a high-risk potential client. You cannot manage your debt, you fall behind on payments, and you may even require credit card relief at one point or another. To mitigate the high risk, lenders attach a high APR to the loans they give such clients. Often, they deem the risk too high to accept such clients at all. 

Lenders report your payments to the credit bureaus, thus shaping your credit score. 

How Credit Scores Impact Your Financial Life 

You don’t have to have a perfect credit score to enjoy most of its advantages. An excellent credit score can give you: 

  • Excellent APR on your consumer debt, including 0% APR periods
  • Various perks like luxury travel rewards and other competitive freebies
  • Annual statement credits
  •  A better insurance premium 

A poor credit score severely limits your financial options. 

  • It may deny you access to some loans and credit cards.
  • It will tighten the terms on your credit cards and loans, hiking the cost of your debt.
  • In extreme cases, it may limit your access to credit cards to secured cards only. 

How to Establish, Build Up, and Improve Your Credit Score 

If You Have No Credit

If you have no credit history, your first step is to start one. You can begin building your credit history by: 

  • Applying for a student card if you are in the position to do so.
  • Piggybacking on someone else’s credit card by becoming an authorized user.
  • Finding a way to earn credit for the utility bills you pay on time anyway. Making timely payments on utilities shows that you are responsible with money and able to handle financial commitments. 

If You Have Bad Credit

If you have a credit history and a bad credit score, you can start improving it right away by becoming more financially responsible and beginning to make payments on time. 

Apply for a card reserved for those with bad credit scores or a secured card. Such a card requires a deposit on your part, but it offers you a path to improving your credit score. If you pay your bills on time for several months, you may get to upgrade your card quickly. Making a habit out of timely payments will benefit you in additional ways in the future. 

If You Want to Build or Improve Your Credit

If you won’t settle for anything less than an excellent credit score, follow these steps. 

  • Keep your eyes on your credit report and score. Report any errors and know what actions had a negative credit score impact.
  • Never fall behind on your payments. Pay your credit card bills in full and on time.
  • Track your credit utilization ratio, and do not let it creep above 30 percent.
  • Understand how taking on new debt or closing an account will impact your CUR.
  • Pay attention to your credit mix and avoid hard pulls on your credit.

Avoid the following actions that may hurt your credit score. 

  • Late payments directly impact your payment history, the most significant component of your credit score.
  • When you apply for new credit, your credit report will note a hard inquiry, whether your request is approved or not. Too many such inquiries within a short time will hurt your credit score. When you check your score, you make a soft inquiry that does not affect your credit score.
  • Not paying your taxes may result in a tax lien that will show up on your credit report.
  • Repossessions and foreclosures are adverse financial events that tell lenders that you are incapable of handling your debt.
  • Bankruptcy, whether chapter 7 or 13, stays on your report for years, dealing your credit scores a significant blow. 

To build a good credit score and thus improve and empower your life, you need to understand your credit report and know your credit score. A good credit score can help you reach your financial goals and take control of your finances. 

When Debt Has Impacted Your Credit Negatively

If your credit score has taken a hit because you are struggling with unsecured debt such as credit card debt, don’t hesitate to explore your debt relief options. The sooner you can get out of debt, the sooner your credit score can begin to improve. 

Contact a ClearOne Advantage Certified Debt Specialist at 866-481-1597 to discuss your situation and get a free savings estimate today.


The information provided is for informational purposes only and is not intended to provide credit or financial advice. ClearOne Advantage is not a lender, credit repair or consumer credit counseling company. ClearOne Advantage doesn’t provide credit advice. Please consult a certified financial advisor for individual credit and lending advice.

Topics: Financial Education