Credit scores can be kind of intimidating.

Having a good one is usually a prerequisite for getting a mortgage or taking out an auto loan. For some people, their credit score is an obstacle. For others, it’s an opportunity.

At the end of the day, it’s just a number (albeit an important one). Let’s start with the basics.

What is a Credit Score?

Your credit score is almost like your financial reputation. It’s often used by lenders to determine how much of a risk it is to give you a loan. The higher your credit score is, the more confident lenders can be that you’ll pay your loan back on time and in full.

Much of the modern-day system for determining credit scores stemmed from a system originally built by Fair, Isaac, and Company (today known as FICO) and three credit reporting agencies who are still the leaders in their industry: Experian, Equifax, and TransUnion.

What’s a Good (or Bad) Credit Score?

Credit scores run on a point system, and the number can be anywhere from 300-850. Based on the scoring model used, the meaning of the numbers may change. According to FICO’s scoring system, here’s what they mean.

  • Poor credit is anything under 580.
  • Fair credit is 580-669.
  • Good credit is 670-739.
  • Very good credit is 740-799.
  • Excellent credit is anything above 800.

Unsurprisingly, the average credit score of most Americans falls around the middle (anywhere from 660-750).

Where to Check Your Score

Since it’s considered a “soft” inquiry, checking your credit score on your own doesn’t affect it in any way (so you can debunk that myth).

There are also a number of websites that offer free, accurate scores. Credit Karma and Credit Sesame are great options if you want a quick, high-level look at the health of your credit.

Your bank may also offer free credit scores – if that’s the case, you can likely view it online, request it directly, or see it on your monthly statements.

To get a more comprehensive picture of your financial health, it’s a smart move to check credit reports (which go more in-depth than your score) with all three of the major credit reporting agencies – Experian, Equifax, and TransUnion. An easy way to do that is by visiting AnnualCreditReport.com, where you can request a free report once every 12 months.

How Your Credit Score is Determined

 The algorithms for determining credit scores are proprietary to each scoring model, such as FICO and VantageScore. According to FICO, here’s the rough breakdown of how your score is determined.

  • 35% based on payment history. The more you pay bills on time or ahead of schedule, the better your score will be. If you fall too far behind or declare bankruptcy, you’ll see a decrease.
  • 30% based on amount of debt. Any auto, home, or student loans are accounted for here – as well as any maxed-out credit cards you have on record.
  • 15% based on credit length. The longer you’ve been able to spend proving yourself as a responsible borrower, the more positive your credit score will be.
  • 10% based on new credit. When you open a new line of credit (like a credit card), you’ll likely see a dip in the short term. Any hard inquiries on your account will also be taken into account here. (More on both of these in a bit.)
  • 10% based on credit mix. This measures the diversity of your debt. Having a solid mix of credit card, student loan, and mortgage payments shows that you have experience with a number of payment types.

How to Improve Your Credit Score

  1. Pay bills on time (or ahead of schedule). It’s one of the most well-known strategies for a reason. Making sure bills are paid regularly shows your reliability as a borrower.
  2. Use credit cards carefully. As mentioned earlier, getting a new credit card will likely result in a short-term decrease in your credit score. But, in the long term, it could be a good way to diversify your credit accounts – just make sure to avoid doing so before any large loan applications.
  3. Keep an eye on credit reports. Regularly, at least annually, review your credit reports by using a free service. Dispute any mistakes or old, inaccurate information could increase your credit score.
  4. Avoid applying too much. When shopping around for a loan or line of credit, it’s a good idea to limit the number of credit products you apply for, especially in a short period of time.

At Nelnet, we’re always looking out for the well-being of our associates – including financial wellness. We’re also on the lookout for associates to join the team – take a look at our current opportunities.