What is a credit score?

More than just a number, your credit score is ordinarily a three-digit number that rates your credit behavior. For example, how you pay your bills may help, in part, to calculate a score. The lenders see the score as a summary of your credit usage and history. It helps them determine the amount they are willing to lend you and at what interest rate.

The three major credit bureaus—Equifax^®, Experian™ and TransUnion^®--collect data about your credit behavior, such as opening new accounts, closing accounts, and generate a credit report to reflect this activity. These bureaus also use the data about your credit behaviors to generate a credit score, using key factors such as payment history and credit utilization. Lenders use this three-digit number to help them determine your creditworthiness. 

Why is credit important?

Credit comes into play at many stages of life. For instance, if you want to buy a home with a loan or lease a car, the potential lender will typically perform a credit check.

Credit matters because it touches some important parts of life. For example, maybe getting a job since companies may run a soft credit check on potential employees.

What does a credit score do?

Though only three digits, this number holds power. It frames your credit history into a concise nugget that makes it easily digestible. It's key to recognize that credit scores are dynamic and ever-changing and capture a snapshot of your creditworthy status for a moment in time. It helps lender decision-makers assess your credit eligibility, but it's not the only thing lenders look at when determining your creditworthiness. In addition to your credit score, lenders may also look at other factors including your salary, savings, collateral and investments.

How is a credit score determined?

Several factors contribute to your credit score. Whether you’ve made on-time or late payments, the length of your credit history and your credit mix are all pieces of information that help determine your credit score. As your credit behavior shifts, it may impact your score.

How credit scores are calculated

Depending on the scoring model used, for example FICO or Vantage, the bureaus may provide you with a different score. However, most scores are based on a few key factors, including, but not limited to:

• Payment history: This factor represents a large portion of your credit score. This accounts for the consistency and timeliness of your bill payments over time.
• Credit utilization: Also known as amount owed, this segment accounts for a decent portion of a credit score. Credit utilization tallies the amount of credit you use compared to the credit you have available.
• Length of credit history: This segment considers the age of your oldest and youngest accounts.

These last two categories each count for a smaller percentage of your score:

• Credit mix: Credit mix indicates the types of credit you have. These may include installment loans, credit cards or mortgages. It's not necessary to have all kinds of credit. But it may be beneficial for your score if you have more than one type.
• New credit accounts: This includes the total number of new credit accounts and loans you’ve opened or applied for recently.

How often are credit scores updated?

Payment cycle data from creditors funnel into the credit bureau databases. So, reports and scores update in an ongoing cycle. It works like a wheel and turns in a perpetual rhythm as you spend and pay off credit. Creditors pass along a record of your balances/debt and payments and your credit history builds. This establishes your credit report and provides the data that FICO and VantageScore develop into your score.

What is my credit score?

Checking your score may help you better understand your credit position. It might also give you a window into what potential lenders can see if they look into your credit. Tracking your credit score might also help you identify and remedy incorrect data on your credit report.

One way to do this is with credit monitoring. Credit monitoring services can offer a way to stay aware of your credit situation. In fact, online tools like Chase Credit Journey^® offer credit scores as well as credit monitoring services.

In summary

Credit matters because it can touch your life at many major moments. Now you know what credit scores can do and how it’s measured — the next step is up to you. Checking your credit score can show you where you stand today to help you plan for a better tomorrow.