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The beginner's guide to credit scores: How to understand and improve your credit score

A good credit score can help you in buying a home, starting a business or getting a car loan. Select explains how to get started building credit.

Good For
Young Professionals
Home buyers
26 min read
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Life is better with a good credit score. This three-digit number affects nearly every facet of your financial life and makes it easier to achieve important milestones, like renting an apartment, buying a car or getting a mortgage for your first home.

In this guide, we will go over everything you need to know about building credit — even if you have no credit history whatsoever.

Whether you are a recent high school graduate or establishing credit later in life, learn how to get on the path toward stellar credit.

How to read this guide

Follow along from start to finish or use the menu to jump to the section(s) you want to learn more about.

Why you need a good credit score

Establishing a good credit score isn't a complex process, but it's vital for your overall financial picture. When you have a good or excellent credit score, you'll have an easier time being approved for renting an apartment, you'll get better rates on car and homeowner's insurance and it's cheaper to borrow money when you need it. 

Having a good credit score can be especially helpful when facing an unexpected financial crisis, like a lay off. When lenders see you as a trustworthy borrower, you're more likely to receive favorable offers for 0% financing if you're ever in a pinch.

A good credit score also unlocks access to the best rewards credit cards that offer cash back, travel perks, protection on major purchases and luxury benefits

Luckily, it's not difficult to establish a healthy credit score once you understand how it works. This guide will walk you step-by-step through the basics, so you can fully understand how your score is calculated, how to establish good credit and how to maintain it in the long run.

What is a good credit score?

Credit scores fall within a range of 300 to 850, with 300 being very poor and 850 being excellent. Credit score ranges vary based on the credit scoring model used (FICO versus VantageScore) and the credit bureau (Experian, Equifax and TransUnion) that pulls the score. Below are the credit ranges for the two most popular scoring models:

FICO Score Credit Ranges
  • Poor: 300 to 579
  • Fair: 580 to 669
  • Good: 670 to 739
  • Very good: 740 to 799
  • Excellent: 800 to 850
VantageScore credit ranges
  • Very poor: 300 to 499
  • Poor: 500 to 600
  • Fair: 601 to 660
  • Good: 661 to 780
  • Excellent: 781 to 850

If your lender is pulling your score from Experian, they will see your FICO credit score. You would need to score between 670 and 739 to have a good credit score.

If the lender is checking your VantageScore with TransUnion, you need to rate between 661 and 780.

Unfortunately, there is no way to predict which credit scoring model your lender will see. Lenders request your information from one of the three credit bureaus, and they don't always use the same one every time.

What is the difference between a good and excellent credit score?

"Excellent" is the highest tier of credit scores: For FICO, it falls between the range of 800 to 850, and for VantageScore, it's between 781 to 850. A perfect credit score of 850 is hard to get, but an excellent credit score is more achievable.

Many of the best credit cards require good or excellent credit. If you want to benefit from competitive rewards, annual statement credits, luxury travel perks, 0% APR periods and more, you'll need at least a good credit score. And if you have an excellent credit score, you can maximize approval odds.

For instance, if you're looking to earn generous rewards on groceries and dining out, the American Express® Gold Card offers 4X Membership Rewards® points when you dine at restaurants and shop at U.S. supermarkets (on up to $25,000 per year in purchases, then 1X). But you'll need good or excellent credit to be approved for the Amex Gold, which Select named the best rewards card of 2020. Terms apply.

On the American Express secure site

And if you want to finance new purchases or get out of debt with a balance transfer card you'll also need good or excellent credit.

Even if your credit score falls within the excellent range, that is not a guarantee you'll be approved for a credit card requiring excellent credit. Card issuers look at more factors than just your credit score, including income and monthly housing payments.

What are the disadvantages of having a poor or fair credit score?

A bad or fair credit score can have a big impact on your overall financial life, influencing the type of loans and products you'll be approved for. 

On the FICO scoring model, a bad score is in the range of 300 to 579, and fair is in the range of 580 to 669. If you're looking at a VantageScore credit score, a very poor score is between 300 to 499; poor falls between 500 to 600 and a fair score is between 601 to 660.

Here are three disadvantages to having a bad or fair credit score:

  • It's less likely you'll be approved for credit cards or loans
  • If you are approved, you'll get less favorable loan terms
  • You'll have limited credit card choices

It's less likely you'll be approved for credit cards or loans

A bad credit score can reduce your chance of approval for credit cards and loans. If you want to get out of debt with a balance transfer card, you'll need good or excellent credit. And few issuers approve users with bad credit for cards with rewards or travel perks.

If you are approved, you'll get less favorable loan terms

Bad credit could mean higher interest rates and annual fees: One of CNBC Select's best credit cards for bad credit, the OpenSky® Secured Visa® Credit Card, has a $35 annual fee; though there are no annual fee options.

OpenSky® Secured Visa® Credit Card

Terms apply. Click here to view the Cardholder Agreement.

On OpenSky's secure site

Terms apply. Click here to view the Cardholder Agreement.

You'll have limited credit card choices

Bad credit limits which credit cards you can qualify for; the options you have will be primarily secured cards. While a secured card, such as the Capital One Platinum Secured Credit Card, can help you rebuild credit, you're required to make a security deposit — typically $200 — in order to receive an equivalent line of credit.

Even if your credit score falls within the bad range, it's not a guarantee you'll be approved for a credit card requiring bad credit, as card issuers consider more than just your credit score.

If you have a less-than-stellar credit score, you should take action as soon as possible, so you can work toward good credit and increase your odds of being approved for financial products like credit cards and loans. 

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What are the factors that make up your credit score?

Credit scores are calculated differently depending on the credit scoring model used. Lenders can pull from any scoring model they choose, but most rely on either the FICO score or the VantageScore.

These are the factors that FICO considers when calculating your score, according to Experian:

  • Payment history (35%): Whether you pay your credit card bills on time
  • Amounts owed (30%): The total amount of credit and loans you're using compared to your total credit limit, also known as your credit utilization rate
  • Length of credit history (15%): The length of time you've had credit
  • New credit (10%): How often you apply for and open new accounts
  • Credit mix (10%): Having a variety of installment loans and revolving credit accounts, including credit cards, auto loans, mortgages and personal loans

These factors influence your VantageScore:

  • Extremely influential: Payment history
  • Highly influential: Type and duration of credit and percent of credit limit used
  • Moderately influential: Total balances/debt
  • Less influential: Available credit and recent credit behavior and inquiries
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How to check your credit score for free

Once you understand how your credit score is calculated, you should check your score. This will give you insight into what products you may qualify for and what interest rates to expect. If you have a low score, you can take steps to improve it. If you have a good or excellent score, you can work to maintain it.

Checking your credit score doesn't hurt your credit, and even if you're not applying for a new card or a loan, it's smart to get into the habit of checking it regularly. (Learn about when pulling your report could actually hurt your credit.)

Most credit card issuers provide free credit score access to their cardholders, making it easier than ever to check and know your score.

Some issuers, such as Citi, provide free FICO Scores, while others, such as Chase and Capital One, provide VantageScores.

You can check your credit score in less than five minutes by logging into your credit card issuer's site or a free credit score service and navigating to the credit score section. There will typically be a dashboard listing your score and the factors that influence it. 

FICO and VantageScore will pull your credit score from one of the three major credit bureaus, Experian, Equifax or TransUnion.

Here are some free credit score resources that you can access even if you don't have a credit card yet:

The above resources also provide insight into the key factors affecting your credit score, simulators on how certain actions may affect your credit and helpful tips for improving your credit score.

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How to improve your credit score if you have no credit history

Building good credit doesn't happen overnight. Instead, you need to consistently practice responsible credit behavior, such as paying bills on time and limiting your credit utilization ratio. 

Here are some credit building options that can help improve your credit score over time:

  • Option 1: Become an authorized user
  • Option 2: Get credit for paying monthly utility and cell phone bills on time
  • Option 3: Open a college student card

Option 1: Become an authorized user

If you're looking to build credit, becoming an authorized user on someone else's credit card is a smart option. It can be relatively low-risk and allows you to build or boost your credit scores. But before you sign up there are some things you should know:

  • How can being an authorized user affect your credit? When you're added as an authorized user to someone else's credit card account, you can piggyback off their credit. With that in mind, you should really only become an authorized user on an account owned by someone with good (670-799) or excellent credit (800-850). Most major card issuers report authorized user data to the three main credit bureaus — Experian, Equifax and TransUnion — but you can call your issuer to confirm.
  • What responsibilities does an authorized user have? An authorized user has no liability whatsoever. Authorized users can make charges, but they aren't responsible for making payments. The primary cardholder has complete liability and is responsible for paying the balance, requesting credit limit increases and generally managing the account. That said, it's essential for authorized users to show good financial habits when using someone else's card. You should not spend beyond your means, and you should make a clear plan with the cardholder to pay off your balance on time and in full each month. You also don't have to actually use the card to see your credit score rise as the result of being an authorized user. So if the cardholder doesn't feel comfortable trusting you with your own card, you'll still benefit from being linked to their account.
  • How do I add/become an authorized user on a credit card? The primary cardholder has to add you as an authorized user. You can either do it online, via your bank's mobile app or over the phone. The process can be completed within a few minutes, and your card will likely be mailed to the primary cardholder's address. Sometimes there's the option to ship the card to an alternative address.
  • How much does it cost to be an authorized user? Depending on the credit card, it may cost nothing to be added as an authorized user. However, some credit cards charge a fee for authorized users. For example, the Chase Sapphire Reserve® charges $75 annually for each additional card.
    Credit cards that don't charge authorized user fees include: Chase Sapphire Preferred® CardCapital One Venture Rewards Credit Card, Bank of America® Cash Rewards credit card, and Citi Double Cash® Card. (see rates and fees)

Option 2: Get credit for paying monthly utility and cell phone bills on time

Having a credit card is not the only way to build credit. If you are already responsible about making your utility and cell phone payments on time, but you don't have a credit card, then you should check out *Experian Boost™. It's a free and easy way for consumers to improve their FICO® Scores. Roughly two out of three people see instant increases to their FICO® Scores, with an average increase of 13 points, and many people become scoreable for the first time as a result, according to Rod Griffin, senior director of consumer education and advocacy at Experian.

The way it works is simple: Connect your bank account(s) to Experian Boost so it can identify your utility and cell phone payment history. Once you verify the data and confirm you want it added to your Experian credit file, you'll get an updated FICO® Score delivered to you in real time. Visit Experian to read more and register. By signing up, you will receive a free credit report and FICO Score instantly.

Option 3: Open a college student card

Applying for a college student credit card is a smart way to start building credit early while also taking advantage of rewards and special financing offers.

There are numerous college student cards available, each providing unique benefits for different types of students — from travelers and foodies to commuters and international students. Some cards are lenient with credit history requirements, meaning you may qualify with no credit history at all. You do have to be 18 to apply for a credit card and need to have a steady source of income.

Here is our pick for the top college student credit card for supermarket shopping. (This card is no longer available for new applications).

Information about the Citi Rewards+℠ Student Card has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.

See our methodology, terms apply.

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How to improve your credit score if you have bad credit

Afraid you can't improve your credit score? Think again. This expert's credit score dropped to 547 during the last recession, but it's back in the 800s now. Once you understand how credit scores work and what options you have to raise your credit score, you'll be surprised to find that you don't need to be afraid of that three-digit number if it's currently less than desirable.

As it turns out, your credit score is quite malleable. Here are some options for improving it: 

  • Option 1: Apply for a secured credit card
  • Option 2: Apply for a card marketed toward consumers with poor or average credit

Option 1: Apply for a secured credit card

secured card is nearly identical to an unsecured card in that you receive a credit limit, can incur interest charges and in some cases can even earn rewards. The big difference is you're required to make a deposit in order to receive a line of credit. The amount you deposit usually becomes your credit limit.

Deposits typically start at $200 and can range up to $2,500. If you want a higher credit limit, you'll usually need to deposit more money.

The amount you deposit acts as collateral if you default on payments, but it's completely refundable if you pay off your balance in full and close your account or upgrade to an unsecured card.

When you use a secured card responsibly (make your payments on time and in full), this information will be sent to the credit bureaus (Experian, Equifax and TransUnion), which helps raise your credit score and put you on the path to qualifying for an unsecured card.

Here is our top pick for the best secured credit card with low interest from a major bank:

Information about the Citi® Secured Mastercard® has been collected independently by Select and has not been reviewed or provided by the issuer of the card prior to publication.

Terms apply.

Option 2: Apply for a card marketed toward consumers with poor or average credit

In addition to secured cards, there are some other credit card options for people with no credit or poor credit who don't want to — or are unable to — put down a deposit. After you open a credit card, make sure you spend within your means and pay your balance on time and in full. In some cases, paying your bills on time for several consecutive months will automatically entitle you to a higher credit limit (be sure to read the card's terms and conditions before signing up).

Here is our top pick for the best credit card for building credit:

Terms apply.

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How to maintain your good credit score

Once you build or improve your credit score, the next step is to maintain it. Keeping your credit score above 670 will make your life easier in many ways. To ensure it stays in the good or excellent range with minimal surprises, you'll want to start developing these simple habits:

  • Tip 1: Pay bills on time and in full
  • Tip 2: Maintain a low credit utilization rate
  • Tip 3: Limit new credit applications

Tip 1: Pay bills on time and in full

Payment history is the most important factor making up your credit score. If you miss a payment, it will show up on your credit report, and multiple missed payments can make it impossible to achieve an excellent score. For this reason, you should always pay at least your minimum payment.

It's also a good idea to pay off your bill in full each month to avoid potential late payment fees, penalty APRs and interest charges that often result from carrying a balance. (Learn when a credit card payment is considered late.)

As a rule of thumb, set up autopay for at least the minimum payment, so you can avoid forgetting a payment. You can also schedule email, text or push notifications through your card issuer.

How to set up autopay:

If you struggle to remember to pay your bills each month (so many different due dates, so little time), there's an easy fix: autopay. If you're not sure you'll be able to pay your bill in full, you can set it so you just pay the minimum as a safeguard to avoid missed payments.

Here are some tips:

  • Login and select "Manage Autopay." Many banks and card issuers will let you schedule autopay for the minimum due, the full balance or somewhere in between. You can also sign up for reminders through their websites, including emails, push notifications or both.
  • Put it on the calendar. You can also set up Google or Outlook calendar invites or make a note of the due date on a physical calendar. It doesn't really matter what notification system you use so long as you pay on time.
  • Autopay also works with your utilities. Most major providers will let you set up autopay that withdraws automatically each month from your checking or savings account (or charges your credit card).
  • You might also get a discount. In the case of student loan and personal loan companies, some give you a discount on your interest rate if you set up autopay.

The sooner you start paying on time, the sooner your score will begin to improve. And just as a bit of motivation, older credit penalties, such as late payments, matter less as time passes. So start now and stay consistent. (Remember: on-time payments is the most important factor in your FICO score.)

Tip 2: Maintain a low credit utilization rate

"If your balances increase over time, your credit scores will suffer. Your credit utilization rate is the second most important factor in scores, behind your payment history," Griffin explains.

To calculate your utilization rate, add up the total balances on all your credit cards and divide by the total of your credit limit across all cards.

Let's say you have two credit cards:

  • Card A: $1,000 balance and $3,000 credit limit
  • Card B: $3,000 balance and $5,000 credit limit

Your total balance would be $4,000 and total credit limit $8,000. That makes your utilization 50%, which is high. You should aim for a low utilization rate around 30% to improve your credit score.

If you find it hard to keep track of the percentage of credit you use, take advantage of various alerts card issuers set, such as when your balance exceeds a certain amount or when you're approaching your credit limit. If you have no problem paying your balance in full each month, you can also call your card issuer and ask them to increase your credit limit. (Learn more about paying off your statement balance every month.)

Tip 3: Limit new credit applications

Each time you apply for credit, an inquiry appears on your credit report, regardless of whether you're approved or denied. This can temporarily lower your credit score by roughly five points, though it will bounce back in a few months. While one credit inquiry isn't likely to hurt your score, it can add up if you apply for multiple cards within a short period of time.

If you want a new card, but you're not sure you'll qualify, you can submit a pre-qualification form online. You can submit as many pre-qualification forms as you want, as they won't impact your credit score.

For anyone looking to open a new card to take advantage of a sign-on bonus, make sure you space out your applications for new cards. There's arguably no such thing as too many credit cards, but it's not wise to apply for several cards within a short period of time — it sends a message to issuers that you might be a credit risk.

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The biggest credit score myths

Like any industry, credit and lending is always changing. As the economy fluctuates up and down and federal regulations change to provide new guidelines and protections for consumers, it's no surprise that credit card issuers change the qualifications for their financial services and products. You've probably heard a lot of credit card myths from people who've been in the game for a long time. But the truth is — you shouldn't always listen to them.

Below, we outline some of the most persistent credit card myths and explain exactly what's true for today's credit card user.

  • Myth 1: You should never close your oldest credit card
  • Myth 2: You need a perfect credit score
  • Myth 3: Carrying a balance helps your credit score
  • Myth 4: Checking your credit score will lower it

Myth 1: You should never close your oldest credit card

Experts often warn against closing a credit card, especially your oldest one, since it can have a negative impact on your credit score. Closing your oldest card is bad for two reasons: It can lower your overall credit utilization ratio and shorten the length of your credit history, two major factors in determining your score. But if you have a strong mix of credit products, a big enough credit limit that you won't go over a 30% CUR and only a few recent inquiries, the dip will likely be only a blip on the radar.

Myth 2: You need a perfect credit score

Does having a perfect credit score really matter? Experts say that a score of 760 or above will likely get you all the same benefits — and the best deals on mortgages and auto loans. In fact, only 1.6% of Americans have a perfect 850 credit score.

Here are our top picks for the best credit cards for good credit

Myth 3: Carrying a balance helps your credit score

Carrying a balance on your credit card doesn't help your credit score, it only has the potential to hurt it and it will end up becoming expensive over time paying interest. Not to mention, it's a waste of money to pay interest on your balance if you can afford to pay off your credit card bill in full each month.

If you do have a credit card balance that you need to pay off over time, consider transferring it to a card with temporary 0% APR. It won't necessarily change your credit score, but a 0% APR card can save you on interest and help you pay off your balance faster, which ultimately helps out both your score and your budget.

Here is our pick for the best balance transfer credit card with the longest intro period:

On Citi's Secure Site

Myth 4: Checking your credit score will lower it

Checking your credit score is considered a "soft pull," which doesn't affect your credit score. Actions, such as applying for a credit card, which requires a "hard pull," temporarily dings your credit score.

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Credit score terms everyone should know

It's easy to get bogged down by the the jargon and acronyms that financial institutions throw around. But there are only a few key terms you really need to understand:

Credit bureau

credit bureau is an agency that aggregates information about your credit history and reports it to financial institutions and other parties, such as real estate and auto companies. The three main credit bureaus are ExperianEquifax and TransUnion.

Credit limit

A credit limit is the maximum amount of money that can be charged to a credit card. Credit limit may also be known as a line of credit, credit line or spending limit.

Credit report

A credit report is an aggregation of your credit history. Credit reports include detailed information on credit accounts, such as payment history, balances, account opening date and more. The information from a credit report is summed up in a credit score. (Here's how to get a free credit report.)

Credit score

A credit score is a three-digit number that represents your creditworthiness. The most common type of credit score is a FICO Score, and scores range from 300 to 850. The higher the credit score, the better. (Read more about how to check your credit score for free.)

Credit utilization rate

Also known as your credit utilization ratio, or CUR, this number is the amount of credit you're using compared to the amount of credit you have available. So if you have an $800 credit card balance and you have a $2,000 credit card balance, your CUR is 40%:

($800 / $2,000 = 0.4 X 100 = 40%)

Experts recommend keeping your utilization rate below 30%.

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Bottom line

Your credit score can have a big impact on your life, but the good news is there are simple steps you can take to improve and maintain it. There's not a lot of mystery around what your score means and how it's calculated, and credit bureaus and card issuers have made it easier than ever for you to regularly check your score so you can understand where you stand.

If you have a bad or fair score, there are straightforward steps you can take to improve it. It's not always an easy process, but it is doable. And the payoff is immense, from lower APRs to better rewards programs, which makes the work all that much more worthwhile.

Our methodology

To determine which credit cards offer the best value, Select analyzed 234 of the most popular credit cards available in the U.S. We compared each card on a range of features, including rewards, welcome bonus, introductory and standard APR, balance transfer fee and foreign transaction fees, as well as factors such as required credit and customer reviews when available. We also considered additional perks, the application process and how easy it is for the consumer to redeem points.

Select teamed up with location intelligence firm Esri. The company's data development team provided the most up-to-date and comprehensive consumer spending data based on the 2019 Consumer Expenditure Surveys from the Bureau of Labor Statistics. You can read more about their methodology here.

Esri's data team created a sample annual budget of approximately $22,126 in retail spending. The budget includes six main categories: groceries ($5,174), gas ($2,218), dining out ($3,675), travel ($2,244), utilities ($4,862) and general purchases ($3,953). General purchases include items such as housekeeping supplies, clothing, personal care products, prescription drugs and vitamins, and other vehicle expenses.

Select used this budget to estimate how much the average consumer would save over the course of a year, two years and five years, assuming they would attempt to maximize their rewards potential by earning all welcome bonuses offered and using the card for all applicable purchases. All rewards total estimations are net the annual fee.

While the five-year estimates we've included are derived from a budget similar to the average American's spending, you may earn a higher or lower return depending on your shopping habits.

For rates and fees of the American Express® Gold Card, click here.

Information about the Bank of America® Cash Rewards credit card, Citi Rewards+℠ Student Card, Citi Simplicity® Card, and Chase Freedom® has been collected independently by Select and has not been reviewed or provided by the issuer of the card prior to publication.

*Results may vary. Some may not see improved scores or approval odds. Not all lenders use Experian credit files, and not all lenders use scores impacted by Experian Boost.

Petal 2 Visa Credit Card issued by WebBank.

Click here to view the Cardholder Agreement for the OpenSky® Secured Visa® Credit Card.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.