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Credit Scores: What’s Involved in Calculating and Building Your Credit

Credit Scores: What’s Involved in Calculating and Improving Your Credit; The first step in improving your credit score is understanding how it’s calculated. Read on for more about how to maintain a good credit score.
Sheryl Nance-Nash
Sheryl Nance-NashUpdated August 14, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
A credit score is a three-digit number which typically ranges from 300 to 850. It’s become the yardstick by which you’re measured for many things, including getting an apartment, obtaining good terms on a mortgage, receiving a lower premium on your homeowners’ insurance, and more. A strong score probably earns you a better interest rate when you apply for loans, too.Whatever your financial goals, getting and maintaining an excellent credit score should be high on your list. If your credit score isn’t where you want it to be, read on to learn more about what makes a good credit score.

Where Do You Stand?

If you don’t know what your credit score is, you may be able to find it on one of your credit card statements or through the app of one of your financial institutions. You may also be able to get your credit score through a credit monitoring service. These services can help you monitor your credit by alerting you when there’s a change. If you’re a small business owner, it can also be worthwhile to stay on top of your business credit score.Once you’ve found out what your number is, you’ll need to figure out how it ranks. For FICO® scores (the ones you’re probably going to see), the breakdown is as follows:
  • 300-579: Very poor
  • 580-669: Fair 
  • 670-739: Good 
  • 740-799: Very good
  • 800-850: Exceptional
The average credit score of Americans in 2022 was 714, with 72% of Americans having a score of 670 or greater. Ultimately, however, it’s important to remember that creditors can have their own definitions for good and bad scores and may consider other factors, as well.

6 Tips to Help You Manage Your Credit Score

If your credit score disappoints you, you can work to make a course correction. It helps to know what factors typically go into calculating your credit score. Bear in mind, though, that even if you try to address these factors, you’re unlikely to see an overnight change in your score since your past behavior can remain on record for many years. Closing an account, for example, or maxing out a credit card can affect your credit score for three months, on average, while a bankruptcy averages more than six years. 

1. Check the Accuracy of Your Credit Reports

To start, make sure that the information in your credit reports is correct. Your credit score is based on what’s called your credit report, which is a compilation of your credit history. The three major credit bureaus that track this information are Equifax, Experian, and TransUnion. You can get a copy of your credit report from each for free at Examine each report for inaccuracies, like accounts that you’ve closed that are still listed as open or don’t indicate that you’re the one who closed them. If you find any errors, report them to the credit bureaus. Ultimately, any relevant corrections should be reflected in your credit score.

2. Prioritize Bill Payments

Approximately 35% of your credit score is based on your payment history, so it’s important to pay your bills on time. Paying your bills on time is also a good practice to adopt in order to stay on budget and on top of your finances in general.You can set up a calendar reminder to alert you ahead of time when bills are coming due. Or you can set up automatic payments from your bank account so that you leave nothing to chance. If your late payments are due to lack of funds, you might consider taking a part-time job or starting a side hustle to bring in extra cash. It may help to apply any extra cash like a tax refund or bonus toward paying off your debt. 

3. Pay Down Credit Balances

As you work on paying your bills regularly, keep in mind that how much you owe is also important. In fact, it accounts for approximately 30% of what’s considered in your credit score. If you can, you’ll want to pay more than the monthly minimum on revolving credit, attacking the highest interest rate card first. If you’re having trouble coming up with the money to make payments or pay off accounts, you may benefit from letting your creditors know that you’re having difficulty. If you let them know your situation, you may be able to negotiate a temporary reduction in monthly payments. Try to work this out earlier rather than later, though. Once your account has gone to a collection agency, it may no longer be possible.

4. Limit Opening and Closing Credit Accounts

The length of your credit history accounts for approximately 15% of your score. Generally, the longer a history you have, the better for your score. Bureaus may look at the ages of your oldest account and your newest, as well as the average age of your accounts.How much new credit you have available accounts for about 10% of your credit score. Bureaus may feel that if you’ve opened several new accounts within a short period of time, that could suggest a credit risk. Your mix of credit types can also play a small role (about 10%) in your credit score. While having a variety of types of credit can be a plus, that doesn’t mean you should take out unnecessary credit for the sake of your mix. And know that, regardless of your credit mix, not all types of credit are good for your credit score. Some scoring models ding you for loans you may have from finance companies, for example.

5. Pay with Cash or a Debit Card

Consider not using your credit cards for a time. This could help improve your credit utilization ratio, another metric in your credit score. It measures how much of the total credit that’s available to you you’re actually using, and the lower it is, the better (at or below 30% is recommended).

6. Keep Track of Credit Inquiries

Many scoring systems do not like if you have what they consider too many applications for credit in a short period of time. They gauge this by how many inquiries are made about your credit, but the situation is a little more nuanced than that.There are two types of credit inquiries: hard and soft. A hard inquiry happens when you’re actively looking for credit, like when you apply for a credit card or a mortgage, and it can affect your credit score. A soft inquiry might occur when you check your own credit or when you get a new job and your new employer checks it. That typically won’t affect your credit score. In addition, credit bureaus allow for what’s called “rate shopping.” If you’re looking for a mortgage, for example, and there are several mortgage-related inquiries within a short period of time, that may not count against you. But if you have multiple credit card applications in a short period of time, that might be considered a sign that you’re having financial trouble and could lower your credit score. 

What Credit Score Do You Need to Buy a House?

Ideally, you should check your credit score six to 12 months before you start home-shopping. That would give you time to work on fixing errors and changing behaviors to enhance your score.Also, you don’t have to be in the 800+ credit score club to get a mortgage. In fact, you may be able to get an FHA mortgage with a 3.5% down payment and a credit score of 580. If your score is less than 580, you could still qualify for an FHA mortgage, but will need to put down 10%.Just realize that while you will likely be able to get a mortgage, you won’t necessarily be offered the lowest mortgage rate or best terms without stellar scores.

Typical Minimum Credit Score by Mortgage Loan Type

When it comes to the minimum credit score you might need to get a mortgage, much depends on the type of loan you get. According to Experian, credit score expectations for different kinds of loans are as follows:
  • Conventional loans: minimum of 620-660 or higher
  • Jumbo loans: 700 or higher
  • FHA loans: 500 with a 10% down payment and 580 with 3.5% down
  • VA loans (insured by the U.S. Department of Veterans Affairs): 620 or higher
  • USDA loans (backed by the U.S. Department of Agriculture): minimum of 580

Can You Get a Personal Loan With Bad Credit?

Yes, you can get a personal loan with bad credit. However, if your credit score is below 500, you may have more difficulty getting a loan or find it harder to get one with a good interest rate or terms.You might take a few months to work on building your credit score. But of course, you may not have that much time. In that case, it might be tempting to take out a payday loan, but the terms on those can often be considered predatory and they may not be a good option. Another option might be to consider asking a trusted friend or family member with a higher credit score to cosign your loan. That might get you better terms, but it also means that your cosigner is liable if you default on your payments. 

Can You Get a Business Loan With Bad Credit?

Yes, it may be possible for you to get a business loan with bad creditOnline lenders may be more willing than traditional lenders to loan to you even if your credit score is lower. You may also be able to get funding that involves some kind of security, such as: 
  • Merchant cash advances - can be used if your business involves credit card transactions
  • Inventory financing - can be used if you need the money to increase inventory
  • Equipment financing - used to purchase equipment for your business

The Takeaway

The good thing about credit scores is they aren’t forever. Where you are today isn’t where you have to be six weeks or six months from now. You can hit the reset button and begin building your credit management skills one step at a time. When you’re ready to look at what loans and credit cards are available to you, Lantern by SoFi lets you fill out one simple form and get a range of credit card offers from our network of lenders so you can get the best fit for your particular needs.

About the Author

Sheryl Nance-Nash

Sheryl Nance-Nash

Sheryl Nance-Nash is a freelance writer specializing in personal finance, business, and travel. Her work has appeared in Money Magazine, Newsday, The New York Times, Business Insider,, AARP the Magazine,,, among others.
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