What Is a Credit Score and Why Does It Matter?

What is a credit score, and why does it matter so much in your financial life? If you’ve ever applied for a loan, a credit card, or even tried to rent an apartment, chances are someone checked your credit score. 

Your credit score plays a crucial role in your financial life. This is why you must understand what it is and how it affects you. According to Experian, the average FICO Score in the U.S. was 715 in 2023, but scores range from 300 to 850. 

This three-digit number can determine whether you’re approved for a loan, what interest rate you’ll pay, or even if you can rent an apartment.

Despite its importance, a recent survey found that nearly 4 in 10 Americans don’t know their credit scores. Let’s break down what a credit score is, how it’s calculated, and why it matters to you.

What Is a Credit Score?

A credit score is a number that represents your creditworthiness.  In other words, how likely are you to repay any borrowed money? It’s a numerical summary of your financial trustworthiness based on your credit history. The number is usually between 300 and 850.

Lenders use this score to determine how risky it is to lend you money. A high score means you’re more likely to pay back your debts on time, while a low score signals more risk.

In the U.S., the most common type of credit score is the FICO Score. The Fair Isaac Corporation created it, although VantageScore is another model gaining traction. The scoring ranges generally look like this:

• 300–579: Poor
• 580–669: Fair
• 670–739: Good
• 740–799: Very Good
• 800–850: Excellent

What Factors Affect Your Credit Score?

Your credit score is influenced by several key factors that reflect how you manage debt and credit. They can help you make better financial decisions and improve your score over time. It’s calculated based on five main factors, and they are:

• Payment history (35%) 
• Amounts owed (30%) 
• Length of credit History (15%) 
• Credit mix (10%) 
• New credit (10%) 

Have you been paying your bills on time? This is the single most important factor. Even one missed or late payment can affect your score. The amount owed is your credit utilization. That is to ask, how much of your available credit are you using? 

Ideally, you want to keep your usage under 30% of your total available credit. The longer you’ve been using credit responsibly, the better. That’s why it can help to keep older credit card accounts open, even if you don’t use them often.

Having a variety of credit types, like credit cards, auto loans, and a mortgage, can help your score. Opening too many new credit accounts in a short period can be a red flag to lenders. Each new inquiry can cause a slight drop in your score.

Why Your Credit Score Matters

Your credit score often impacts many areas of your financial life in ways you might not expect. It affects more than just loan approvals. Knowing how it impacts your finances can help you stay prepared and in control.

1. Loan and Credit Card Approvals

It is obvious why this comes first. Whether you’re applying for a credit card, personal loan, car loan, or mortgage, your credit score is one of the first things lenders look at. A high score can lead to easier approvals and better terms.

2. Interest Rates

Most times, a higher credit score means a lower interest rate, which can save you tens of thousands over the life of a loan. For example, let’s say you’re taking out a 30-year mortgage for $300,000. Your interest rate with a credit score of 760–850 will be different from that of 620–639. The latter will come with a higher interest rate.

3. Renting an Apartment

Landlords often check your credit when you apply for a rental. A bad score might make them hesitate or require you to put down a larger deposit. This is because your credit history helps them guess how reliably you’ll pay rent on time.

4. Utilities and Cell Phones

Even utility companies and mobile providers might check your credit. With a good score, you may be able to avoid deposits or qualify for better plans. A poor score, however, could mean upfront payments or limited service options.

5. Job Applications

Some employers in the financial sector check credit reports during the hiring process. A negative credit history could raise concerns, especially if the job involves handling money.

How to Build and Improve Your Credit Score

A good credit score can open doors to better loan rates and lower interest charges. Whether you are looking to buy a home, finance a car, or simply qualify for a credit card, having a strong credit score is essential. If you’re just starting or trying to repair past mistakes, here are some practical steps to build a better credit score:

• Pay on time every time
• Keep balances low
• Don’t close old accounts
• Limit new applications
• Use a secured credit card
• Become an authorized user

Set reminders, automate payments, and do whatever it takes to ensure you’re not missing due dates. Payment history is the most important factor. Each hard inquiry can lower your score a bit. Only apply for new credit when you need it.

Length of credit history matters. That old store credit card you never use? Keep it open.

Try to use no more than 30% of your available credit. Even better is 10% or less if possible. If you have a trusted family member or partner with good credit, see if they’ll add you as an authorized user on one of their credit cards. Their positive history can help boost your score.

Conclusion

A good credit score can save you money, make life easier, and help you build a solid financial foundation. But it doesn’t happen overnight. It takes consistent habits, planning, and a little patience.

The good news is that once you get the hang of it, keeping your score in good shape becomes second nature. So take the time to check your credit, keep those payments on time, and treat your credit like a valuable tool.