Credit score basics.

Credit affects so much of our lives—where you live, what you drive, how you manage a financial crisis. But how your score is determined isn’t always common knowledge. Working Credit is here to help.

What is a credit score?

Put simply, your credit score is your reputation as a borrower. And your credit score is supposed to tell lenders how likely you are to pay them back. It’s entirely based on your credit report, which is information compiled by the credit bureaus. There are different credit score models, but the most commonly used ones are based on equations created by the Fair Isaac Co, or FICO®. Most lenders use your FICO® scores so that they don’t have to read each and every full report—it’s effectively a shortcut for them to make a lending decision.

In some cases, your credit scores can be used to see how you deal with money. A landlord will use it as a gauge to see if you will pay rent on time. A cell phone service provider will use it to see if you can finance a cell phone.

Your score can range from 300 to 850. A score between 300 and 600 is subprime, a score between 601-660 is near-prime, and anything above 661 is prime. Generally, prime scores allow you to get better rates when borrowing. You can get your credit scores from a credit bureau, and almost all lenders use a FICO® score. The three major credit bureaus are Transunion, Experian, and Equifax. Since they all work independently, you might see slightly different scores from each one, but they should be relatively close.

In order to have a FICO® score, you must have at least one active loan or credit card that reports to the credit bureaus for at least six months. The score doesn’t take into account a person’s income or assets. It looks at how well the borrower manages their loans and credit cards—whether they paid their bills on time, whether they keep their credit card balances low (ideally below 30 percent of the credit limit), and whether any of their debts turn into collections.

What is a “good” credit score?

Once a person has a loan or credit card that generates a credit score, it’s easy to build up your credit. The credit scoring system doesn’t look at how much you borrow, just that you pay it back. So that means that a $300 loan will produce the same results as a $3,000 loan. It’s also important to note that credit scores are sensitive to recent information. So make sure you are making regular on-time payments on a current loan or a credit card. Those payments can have an effect fairly quickly—usually within three to six months.

How do the credit bureaus score?

The credit bureaus pay attention to your borrowing behavior. They look at a few things to determine if you’re a trusted borrower:

Do you keep your credit card balances below 30% of the credit limit? Having an available buffer of credit is important to the bureaus.

Do you make loan and credit card payments on time?
Late payments on reported loans and credit cards will negatively impact your credit score.

Are your bills (any of them) going to collections?
The bureaus will see any bill that goes to collections, and it will negatively affect your credit score.

Who reports to the credit bureaus?

Credit card companies and any company that offers installment loans report to the credit bureaus every month. They share whether you paid your bills on time, and if you paid them in full. The bureaus only look to see if you paid the minimum balance due on credit card, and if you have a balance left, how much that balance is.

Other entities that report to the credit bureaus are collection agencies. If you don’t pay a bill—any bill—it can possibly go to collections. When it does, the collection agencies will report what you owe to the credit bureaus each month.