After being asked to provide an article to our marketing team, I wanted to do something other than turf to change things up a bit, so this month, I wanted to provide some general information about credit scores. We often hear about them, but do you know what they mean or how they’re calculated?

A credit score is a three-digit number that summarizes a person’s creditworthiness based on their credit history. It helps potential lenders evaluate how risky you are as a borrower. However, its impact also can go beyond credit cards and loans. Property managers, potential employers, and insurance companies, among others, may also use credit scores in evaluating potential tenants, employees, or policyholders.

What’s Considered a Good Credit Score?

Though several services create credit scores, the most widely used is the FICO score, which ranges from 300-850. The higher the number, the better, and there are five general categories in which consumers fall:

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

How Your Credit Score Is Calculated

Credit agencies base your score on several factors, each weighted slightly differently, according to FICO:

  • Payment history (35%): Your record of making on-time payments.
  • Amount owed (30%): This factors in how many of your accounts have balances, how much you owe and your credit utilization ratio, which is the percentage of your total credit limit you are currently using. The lower your credit utilization ratio, the better.
  • Credit history (15%): How long you’ve had your accounts. The longer, the better.
  • New credit (10%): This considers how many credit checks—for loans, credit cards, or lines of credit—you’ve had in the last 12-18 months. Having a high number of credit inquiries can negatively impact your score.
  • Credit mix (10%): This tracks the different kinds of credit you have, including revolving, installment, or open. Having and responsibly managing a mix of credit can help your score.

Strategies That Can Help Maintain or Improve Your Credit Score

There are several things you can do to help develop and improve your score over time:

  • Pay your bills on time. The most significant factor in determining your credit score is your payment history, so making timely payments is critical. To achieve this, consider setting up automatic payments.
  • Minimize your credit utilization ratio. A low credit utilization rate—only using a small percentage of your available credit limit—shows you aren’t maxing out your credit cards or overspending. You can calculate this number by adding up what you owe on all revolving credit accounts and dividing that number by your total credit limits for those accounts. Aim to keep this number below 20% to maintain a good score.
  • Limit your credit applications. Applying for a lot of credit over a short time span, especially for credit cards, can have a negative impact on your score. 
  • Keep an eye on your credit report. Monitor your credit score and review your credit reports at least once a year with all three national credit bureau agencies: Equifax, Experian, and TransUnion. Look for any errors or signs of fraud so that you can catch and correct them before they impact your score. Contrary to popular belief, checking your credit score frequently will not negatively affect your rating.
  • Be cautious when closing accounts. Closing accounts, even ones you don’t use often, can negatively impact your credit score by shortening your credit history and shrinking your available credit limit, which will affect your credit utilization ratio.

How To Protect Your Credit Score if You Suspect Fraud

Putting a freeze on your credit can reduce the risk of someone fraudulently opening a credit account in your name, as it prohibits credit agencies from disclosing your credit report to anyone requesting the data. A credit freeze won’t impact your credit score or your ability to use your existing credit accounts. Just remember that you will need to lift the freeze with all three credit agencies whenever you apply for a new credit account.