What is a credit score?
Let’s dive into the details of how credit scores work and how you can boost that all-important number.
Updated 
10 min. read
There are quite a few numbers that make up the picture of your financial life — and one of the most important is your credit score. But it can also be one of the trickiest to understand. What factors impact your score? Why does your score matter? And while we’re at it — what exactly is a credit score?
We’re here to answer all these questions and more, as we dive into the details of what makes up your credit score, how it can impact your finances, and (maybe most importantly) how you can improve your score in big and small ways.
What is a credit score?
Let’s start it from the top — what is a credit score? Your credit score is a number used by creditors (a.k.a. financial institutions that loan you money) to predict your credit behavior, like how likely you are to make payments in a timely and reliable manner.
Your credit score is important because a high score can make it easier to make big financial moves like getting approved to rent an apartment, getting approved for a loan, or scoring a good insurance premium.
When you check your score, you’ll see a three-digit number that’s typically somewhere between 300 and 850. But how is this all-important number calculated?
Your credit score is determined by a variety of factors, with an emphasis on your past credit and borrowing behavior. These include things like:
- Outstanding balances and current unpaid debt
- Payment history and whether you pay on time
- Length of credit history
- Percent of available credit used
- Applications for new credit accounts
- Types of credit you use (mortgage, credit cards, car loans, etc.)
When it comes to obtaining credit (like applying for a mortgage or taking out a loan), your credit score will be a major factor. Your score can be used to determine whether or not you're approved to borrow money and what your interest rate may be.
Typically, a higher credit score means a better chance of getting approved and a lower interest rate to boot. To lenders, a low score means they’re taking on more risk when they lend you money, which might lead to a higher interest rate or a denial of your application. But don’t worry — we have some tried-and-true tips ahead for improving your score.
While your credit score is a number that represents your credit history, your credit report (which sometimes lists your credit score) covers details like your past credit inquiries, applications, and current credit accounts like loans and lines of credit.
How do credit scores work?
Now that you understand the basics of a credit score, let’s dive into the details of how your score works and how you interact with it.
You might be wondering — what is a good credit score? The short answer: the higher, the better.
If you want to dive into more detail, a score of 700 or higher is a solid score. You’ll typically be considered a good candidate for a loan and enjoy lower interest rates when you apply for credit, including mortgages or personal loans.
If your credit score sits below 640, you’re considered a risky client for creditors – this is also known as a subprime borrower. As a result, you might have a harder time getting loans, and if you do, you’ll likely be subjected to higher interest rates. It might also make it difficult to do things like get approved for a rental apartment.
*Based on the TransUnion® credit score range, 5/2023.
Want to know what your credit score is? There are a few ways you can see your credit score and credit report for free. It’s important to keep an eye on your score and regularly review your credit report to help prevent fraud, errors, and potential identity theft.
Here a few ways you can check your credit report and credit score:
1. Major credit agencies
One way to find your score is to check with the three major credit reporting agencies that create credit reports in the U.S. These are:
The credit reports created by these agencies contain an overview of your payment history, how much credit you have and use, past credit inquiries, and other information. You can receive a free credit report from each agency once a year.
If you want to receive your credit score from these agencies, keep in mind that you may have to pay for their services. This might include credit monitoring and identity theft protection.
2. Free online credit services
If you want to check your credit report for free, there are a variety of credit services online that will pull your credit report for you from the major credit agencies.
One reputable service is AnnualCreditReport.com, which will let you review your credit report from each of the three major credit agencies for free up to once a year. This is the only website authorized by the federal government to issue free, annual credit reports. Keep in mind that these reports do not typically include your credit score.
3. Your lender or financial institution
In some cases, your credit card company or lender might provide you with your free updated credit score each quarter. Check your monthly statement or log into your online account to see if they offer this service.
Alternatively, many banks provide credit scores for their members free of charge. For instance, BMO CreditView is a free, instant way to check your score.
It’s important to note that often, your credit score will vary across the different credit agencies. That’s because the different credit agencies use different data to tally up your score. So it’s okay if you see slightly different scores across different agencies or at different times.
How is my credit score calculated?
Once you know your credit score, it’s important to understand the different factors that impact that all-important number. This can help you maintain your score if it’s high or know how to give it a boost if it could use improvement.
Typically, your score is calculated by using a credit scoring model, like FICO, VantageScore, or custom models. These models run the numbers from your credit report and turn it into your credit score number.
Keep in mind that scores are calculated in different ways at different times, so there is no one exact formula to determine your score. However, there are a few factors that we know have a real impact. Here are the factors that FICO, the most popular credit scoring model, considers when calculating your score:
35% - Payment history
Your previous repayment behavior, like paying your bills on time and making at least the minimum payment. It also includes if you’ve had to deal with a collection agency or if you’ve ever declared bankruptcy.
30% - Unpaid balances
Any outstanding balance or unpaid debt on credit cards or loans.
15% - Length of credit history
The amount of time you’ve been using your credit accounts. The longer you’ve had accounts in good standing, the better you’ll look.
10% - Types of credit
Having different types of credit, like a credit card, a loan, a mortgage or a line of credit, can help improve your score – if they’re all in good standing, of course.
10% - Credit inquiries
An inquiry is when a lender looks at your credit during the application process. Too many in a short period can be a red flag for creditors.
How to improve your credit score
Now that you have a better understanding of how your credit score works, you might be motivated to try and improve yours. There are lots of things you can do, both big and small, that can have a major effect on your score.
Here are a few ways to improve your credit score in the short and long term:
- Be aware of your credit score. It’s important to check your credit score and credit report regularly to make sure all the information is correct, and to identify any issues that could have a negative impact on your credit rating.
- Make your payments on time every month. Your payment history is an important part of your credit score. The longer you go without missing a payment, the better your score will look. Consider setting up automated payments for recurring bills so you don’t even have to think about it.
- Keep your credit card balances as low as you can. Ideally, you should pay your credit cards off in full each month. If that’s not possible, do the best you can. Keeping your balance low in relation to your available credit limit is considered responsible credit behavior by the credit bureaus. A good rule of thumb is to use less than 30% of your available credit. For example, if your credit card has a $3,000 limit, try to keep your balance below $1,000.
- Monitor your spending. When it comes to your credit cards, keeping a close eye on your spending can help reduce the risk of running up a high balance. That will make it much easier to pay your card off in full for each statement period. Using your cards for specific purposes, like grocery shopping, can help control spending.
- Don’t cancel all your cards at once. Once you get your balances back down to zero, it’s tempting to cancel your credit cards to avoid future problems. But if you cancel one or more of your cards, that will decrease your total credit available and may reflect a high utilization of credit which could negatively impact your score.
- Don’t apply for too many loans or cards at one time either. Applying for lots of loan products over a short period of time can be flagged as risky behavior.
What if you don’t have a credit history established? First, slow and steady wins the race. The secret to a solid credit history is time, so don’t rush it — too many credit applications can actually be a red flag when it comes to your score. And opening multiple cards at once can actually hurt your score, so take it easy when applying for credit products and make any payments on time.
But how do you start to establish credit if you don’t have a credit history? Can you still get approved for a loan or credit card if your credit score is low or non-existent?
One way you can work on your credit is by getting a secured credit card. A secured credit card works similarly to a traditional credit card. The main difference is that these cards are secured by funds in a deposit account, which acts as collateral for your credit card. It’s a great option for anyone looking to build or rebuild their credit.1
The key for secured and unsecured credit cards or any other type of loan or financial payment ― such as rent, utilities and student loans ― is to pay on time. Paying on time, 100% of the time, illustrates that you’re financially responsible and can pay back what you borrow.
Another option for building a solid credit history is a credit builder loan program. With these programs, participants take out a fixed-rate loan that is immediately invested into a Certificate of Deposit savings account. When the loan is repaid and the Certificate of Deposit matures, you’ll receive the amount you invested – plus interest! The goal is to make it easy for you to make a series of on-time payments, which is one of the best ways toward a higher credit score.
In conclusion
Your credit score is more than just a number. It’s a representation of your financial history — and it can be a testament to your hard work and dedication.
Like all good things, building a strong credit score takes time. While there’s no magic formula or quick fixes to improve your credit score overnight, there are plenty of tried-and-true strategies like making on-time payments and keeping your unpaid balances low.
Remember, taking it one day at a time is the key to building up good habits that will help you slowly and steadily boost your score and take control of your financial future.
Ready to take the next step? Check your score with BMO CreditView, learn more about the BMO Credit Builder Program, or explore more financial resources with BMO’s Real Financial Progress Hub.
FAQs
If your credit score is 700 or higher, you’re typically considered to be a good candidate for a loan.
Factors like late payments, outstanding balances, or high credit utilization can all ding your score. You might also see a negative effect on your score if you haven’t been building credit for a long time, don’t use many types of credit, or cancel your credit cards.
Unfortunately, there’s no magic trick for quickly raising your credit score. But smart strategies for boosting your score in the long-term include making your payments on time, keeping your balances low, and not applying for or canceling too many cards at once.
There are lots of factors that impact your credit score, including payment history, length of credit history, and how many types of credit you use. Sometimes, a little debt can be good because it gives you the opportunity to make on-time payments and boost your score.
No, these are two different things. Your credit score is a number that represents your credit history and is used by lenders to determine your creditworthiness. Your credit report (which sometimes lists your credit score) is a detailed document that covers your past credit inquiries, applications, and current credit accounts like loans and lines of credit.
Don’t worry, requesting your own credit report doesn’t impact your credit score in any way.
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Footnote 1 details. Impact on your credit may vary. On-time payment history can have a positive impact on your credit score. Late payment may negatively impact your credit score.