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Your credit score can change your life financially with dramatic effect. But like a knife that can help you or hurt you, understanding your credit score is key to gleaning benefits and not harming yourself.

What Is a Credit Score?

A credit score gives a snapshot to creditors (banks, stores, other people) of how likely you are to pay back your debts. The FICO score (Fair Isaac Corporation) now “FICO Score 8” provides a numeric result from 300 to 850; the higher the score, the more creditworthy and likely a borrower is to repay their debt. 

Credit scores are compiled based on three major credit bureaus: TransUnion, Equifax, and Experian. They use the same credit score models more or less though scores can vary slightly from bureau to bureau. 

The score measures different lines of credit for a borrower’s behavior.

Different Types of Credit Scores

There are two types of credit scores. The first is a FICO score which is compiled by credit reporting agencies and is an absolute record of creditworthiness. The second is a “Vantage Score” which is a close-enough guess of what your FICO could be. 

The Vantage Score allows for a more often but less detailed look into a borrower but would never be used for lending money – it’s too inexact. However, for the borrower, this is a great tool. 

Every year, US citizens are given a free credit report as provided by US law. This is the government site that will give you all three reports from the credit reporting bureaus but they are not required to give you a score. 

Sites like will provide a Vantage Score, a view of all the credit accounts on your report and tools to avoid and deal with identity theft. A Vantage Score is not a FICO score, but unless you’re making a major credit purchase, it will be sufficient. 

If you apply for credit with a lender, they will provide you with the report they received and your score will be on it, I encourage you to request this when you’re able.

“Hard Inquiry” vs. “Soft Inquiry”

In credit terms there are two different kinds of credit “pull” whereby an entity gains your score. One can hurt your credit (temporarily) and the other is harmless but less useful. The difference between the two makes sense. 

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Hard inquiries will hit your credit report and lower your score for a 90-day period. A soft inquiry does not affect your credit score at all – you could run soft inquiries a thousand times a day with no adverse effect on your credit score. 

Hard Inquiry

A hard inquiry is one where a person or business is applying for credit. They are asking for another business to lend them something of value with the promise of paying it back. If you have your credit “run” at a car dealership, for a mortgage, or when applying for a credit card, this is a “hard” credit inquiry because you intend to gain something of value from it. 

When you apply for credit through a hard inquiry, detailed information is taken involving your full social security number, address, financial information, and other personal details. To comply with laws pertaining to credit, you’ll need to authorize the credit “pull” or hard inquiry before moving forward in the process. 

Too many hard inquiries in short succession will end up negatively affecting your score but spacing out new inquiries (at least 91 days apart) will help. 

Soft Inquiry

A soft inquiry is used to verify your identity but does not hurt your score. Typically, a soft inquiry will ask a person or business a series of questions that pertain to information publicly available about you or from information in your credit report. 

Some of the questions (usually four) will have incorrect information to ensure that applicants are real and will offer a “None of these” option. For example, let’s say your first car was a Ford Escort. One question might be: 

Which of the following cars have you owned? 

  • 1997 Chevrolet Suburban
  • 1999 Toyota Camry
  • 1998 Honda Accord
  • 2000 Dodge Ram
  • None of these

Other questions may ask for an approximate payment range but not an exact amount: 

You have a mortgage with Bank of America, which is your payment range? 

  • $1000-1100/month
  • $1200-1400/month
  • $1750-1775/month
  • $2800-2850/month
  • None of these

By answering correctly, even where the answer is none of the above, the agency pulling your soft inquiry will be able to verify that you are you. 

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What Comprises a Credit Score?

A FICO score or credit score consists of five sections of varied weight. 

  • 30% – Amounts Owed (Utilization
  • 10% – New Inquiries (Hard inquiries/pulls)
  • 15% – Length of Credit History (How long you’ve held an account open)
  • 10% – Credit Mix (types of obligations, car, house, credit card)
  • 35% – Payment History (Do you pay your bills on time?)

Amounts Owed

Less important than the dollar amount owed is the amount of credit you’re using in relation to how much is available. For example, if you have a credit card with a $2000 limit and every month you spend $1500 on it but pay it off when it’s due, you’re utilizing 75% (1500/2000) of your available credit and that looks dangerous to a bank. 

However, if you’re spending $1500 monthly with a $20,000 credit limit, you’re using just 7.5% of your available limit and appear low risk to a bank. Ideally, banks like to see a customer under 10% utilization on “revolving accounts” credit cards. Your score will be negatively impacted if utilization on any one account exceeds 30%.

New Inquiries

When people advise you not to do something that will “ding” or “hit” your credit report, they are referring to new inquiries. I covered above hard inquiries so I won’t spend more time on that here, but the penalty for new inquiries is short lived. 

New inquiry penalties cause the most damage to this 10% section in the first 90 days, and then most of the effect has fallen away. All new inquiries drop off after 24 months. 

Length of Credit History

The longer you prove you can be trusted with lent money and valuable assets, the better. If you have one account open for 20 years (like a student loan or a mortgage) that can give you a boost. It’s one reason why you should avoid shutting down any credit line you can afford to keep. 

This is a small but important part of your credit score and one reason why older people are more likely to have more stable credit scores because they have been proven over time to be trustworthy. 

Credit Mix

Banks want to see a balanced borrower. They know that those who do not have recoverable assets and established lifestyles may be less likely to pay back revolving accounts. Holding a mortgage, car loan, and credit card will show an established individual with a history of paying their obligations.

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Payment History

Most important to any credit score is your history of on-time payments. The easiest way to determine if a borrower is likely to repay a lender is to look at how consistent they have been in-so-doing. If a borrower has a history of paying late that could demonstrate a credit risk to the lender. 

How To Use Your Credit Score To Your Advantage

With a higher score, mortgage rates, car loans, and personal loans will carry lower annual percentage rates with better terms. Credit limits will increase as well. 

The easiest way to use your credit score to your advantage is to gain valuable points, discounts, and included benefits with credit card accounts. With a high credit score there’s literally untold amounts of points and miles you can earn to offset the cost of travel and even everyday purchases. 

Many lenders allow borrowers to transfer their debt to the new card for “0%” interest for a fixed period of time (usually 12, 18, or 24 months) if they pay a one-time fee, usually 3% of the transferred amount. Most car loans are higher than 3% and those amounts are not fixed, so it may be in a borrowers interest to move specific amounts of debt to credit cards with offers like this one to reduce their interest expense and retain more cash on hand. 

An important cheat code to improving your credit score is to keep free credit lines open with zero balances for as long as possible. 

For example, assume you had a credit card that carried an annual fee that you no longer want to carry or use any longer. If you have the card switched to a no annual fee card (most have this) and carry a zero balance, then each month an on-time, in-full payment will appear on your credit report. This will help your payment history, your utilization, and your credit history.


There is a lot to know to better understand your credit score. This post is not a complete and exhaustive guide, but it’s a start that should help you on your way to knowing about the world of creditworthiness and how to use it to your advantage.