Your use of credit is an open book. Your credit history including a record of your past borrowing, repayment history, and the current status of all your credit relationships is constantly monitored and updated by TransUnion, Equifax, and Experian, the three major credit bureaus.

All this information is compiled into your credit report(s). That information is then turned into a three-digit credit score that affects the interest rate you’ll pay for a mortgage loan and other types of credit accounts.

Let’s take a closer look at credit scores why they matter, how they work, how to obtain your score, and even whether you should bother to find out what your score is.

Credit score basics

In 1989, a company called Fair Isaac Corporation (FICO) developed a formula for turning the information in credit reports into a three-digit credit score. The score allows a lender to gauge at a glance the level of risk a borrower represents.

FICO scores range from 300 to 850, and unlike cholesterol, the higher the number, the better. Generally, it takes a score in the mid 700s to obtain the best interest rate on a mortgage or other loan.

According to Fair Isaac, a person with a high score is likely to get a mortgage rate about 1.5 percentage points lower than a person with a lower score. The rate-spread is even more dramatic with auto loans. In other words, a top score can translate into a savings of tens of thousands of dollars over time.

How to build a strong credit score

Credit scores are based on the five factors shown in the accompanying table. These factors tell you much of what you need to know about building and maintaining a high score.

  1. Pay your bills on time. Late payments can stay on your credit report for seven years. That’s a long time to be penalized for not keeping track of payment due dates.
  2. Manage how much of your available credit you are using. The credit bureaus look at your credit balance at some point in the month regardless of whether you plan to pay it off in full when you get your bill. That information is used to tally your “credit utilization,” which is how much of your available credit you are using at that point in time. It’s best to keep your utilization to less than 30% even better to keep it at 10% or less. That means if you have a $10,000 credit limit, you should strive to use no more than $1,000 of it.
  3. From a credit score perspective, the longer you are a responsible user of credit, the better.
  4. Opening new credit accounts will tend to hurt your score, at least temporarily.
  5. The scoring models prefer that you use a mix of revolving credit (such as credit cards) and installment loans (such as a mortgage, car loan, or student loan).

Bottom line? Paying your bills on time and using a relatively small amount of your available credit are the two most important ways to keep your credit score strong.

You have more than one credit score

Fair Isaac actually produces several different FICO scores, including: a broad general use credit score; scores designed to meet the unique needs of mortgage lenders, auto lenders, and credit card issuers; and scores that are unique to each of the credit bureaus.

Adding to the cluttered credit score landscape is the fact that FICO isn’t the only scorekeeper in town. In 2006, the three big credit bureaus banded together to create VantageScore as an alternative to the FICO score.

According to the VantageScore website, the alternative improves on FICO’s methodology and creates credit scores for the “tens of millions of credit-worthy borrowers who were not provided a credit score by traditional models.”

Obtaining your credit score

Whether you should obtain your score(s), and where, depends in part on whether you plan to do something in the near future that requires a high score. It’s generally a good idea to have some knowledge of the state of your credit score.

Several credit-card issuers now provide a free score often, a FICO score to their cardholders. A free copy of your VantageScore is available from sites such as, Credit Karma, LendingTree, and Quizzle. In many cases, these free scores are sufficient.

However, if you plan to apply for a mortgage or a new job and don’t have access to a free FICO score (which is still the gold standard) through a credit card provider, it’s a good idea to pay for one. At, you can buy one bureau-specific score for $19.95. If you opt for scores based on information from all three major credit bureaus, you’ll pay $59.85. The three scores won’t be identical, but they should be within about 50 points of each other. If there’s a larger difference, something may have been misreported to one of the bureaus.

Note, employers don’t have access to your credit score, but they do have access to your credit report. Since a low score especially if you believe you’ve been managing your use of credit responsibly may indicate that there’s an error on one of your reports, it’s worth knowing your score before you start scouring your credit reports looking for errors.

You’ll want to know about any problems with your credit score well in advance of applying for a mortgage or job, as it can take 90 days or more to resolve a dispute.

Does your credit score really matter?

Some financial writers/speakers think credit scores are overhyped and irrelevant. Calling it an “I-love-debt score,” Dave Ramsey writes on his site that “The only way to have a good credit score is to go into debt, stay in debt, and continually pay your accounts perfectly without adding too much debt or paying too much off. In other words, stay in debt for as long as you can.”

But that’s misleading and may perpetuate the myth that you have to carry a balance on credit cards in order to have a good credit score. You do not. You just need to be a responsible user of credit (your credit score isn’t penalized for paying your balance in full each month).

If you’re committed to a debt-free lifestyle, our intent is not to talk you out of that. One of the main uses of a credit score — to help you obtain new credit — is, indeed, irrelevant for you. However, because so many organizations make other important decisions about you based, in part, on how you manage your use of credit, most people will find it beneficial to know their score and be proactive in keeping it strong.