Close up of hands at wooden desktop with laptop computer and abstract credit score scale on screen

Tips For Understanding Your Credit Score

A universal method for better understanding someone’s borrowing history was invented in 1989: the FICO Credit Score. Since its creation, billions of people across the globe have struggled to understand what makes up the intricate scores given to them on a monthly basis and how those scores impact the cars they buy, the houses they mortgage, and the credit cards they are issued. Below is a comprehensive guide to how your credit score is measured and what impacts those scores. 

Our goal in this Money Chat is to help you better understand the credit score system and what impacts those scores. 

Scoring A Credit Score

The simplest place to begin is at the score itself. The average American is issued three separate credit scores by the three major credit bureaus—Equifax, Experian, and TransUnion. We will touch on how the three bureau system works later, but each score is rated, relatively, the same. 


Credit scores are given from 0-850, but only considered valid from 300-850. 300 being the lowest active credit score possible and 850 being a nearly unattainable perfect credit score. 300-579 is considered poor credit. 580-669 is fair. 670-739 is good. 740-799 is very good. And finally 800-850 is exceptional credit.

These sets of scores are the basis for every loan transaction in the United States. When you’re issued a credit card, the creditor issuer will comb through your credit history and assign you an interest rate based on your credit score which is a culmination of your credit history. But how are the scores calculated? 

Credit scores are determined by payment history, the amount of credit you owe, the length of time you’ve had an open line of credit, the mix of credit accounts you own, and the recent activity on your credit lines. 

In simpler terms:

  • How often you pay your accounts represents 35% of your credit score;
  • The total amount of credit you currently owe represents 30% of your credit score;
  • The length of time your credit accounts have been active represents 15% of your score;
  • The mix of credit account types (such as credit cards, mortgages, auto loans) represents 10% of the score; 
  • And the newest credit lines represent the remaining 10% of your score.

These percentages vary slightly based on what credit bureau is reporting your score, but it’s imperative that to have a good credit score, you must pay all of your bills on time as 35% of your score is explicitly determined by “how reliable the consumer” is. 

Credit Accounts

While credit scores do not account for age, ethnic background, geographical location, current employment, or a bevy of other uncontrollable circumstances, credit scores do include three different account statuses—current, past due, and collections


The easiest to understand, a current credit account is one that is currently being paid on time with no issues. A majority of Americans only have current accounts as they work to pay off credit cards, mortgages, and auto loans. If payments are made on time, the accounts are current and therefore do not impact your credit score. It is worth noting that the volume of the account does impact your score, however. If the credit line is too small (under $1,000 in most cases) or too large (over $50,000—except for mortgages), your credit score may be lowered temporarily. 

Past Due

Many Americans have “past-due” accounts on their credit reports. While any credit line going unpaid will negatively impact your score, past due accounts only last as long as the account is active. 


The most impactful of the account types is collections. Once your account is considered “delinquent” by the originating creditor, a collections account may be placed on your credit score. This new account will dramatically decrease both your current score and your future chances at raising your credit score. Typically, collections accounts remain on your credit score for up to 7 years before being automatically removed. It is imperative that you either do not let any account enter collections by timely paying down your debts, or, if it has entered collections, work closely with the collections agency to resolve the account. 

Contact Collection Agencies

Collection agencies, either internal groups from the originating creditor themselves or third parties, will often work closely with consumers to resolve their overdue accounts. If you have had an account placed with a collection agency, reach out to their team to set up a workable payment plan or even negotiate down the amount owed. 

Credit Bureaus

As mentioned above, there are three credit bureaus. EquiFax, Experian, and TransUnion all have slightly different reporting methods but all follow the 300-850 score scale. While having three credit reports may be confusing, it is vital to have diversity in the credit system. Each bureau collects data slightly differently and thus could produce a score that varies on what the other bureaus are reporting. 

Let’s say, for example, that Experian receives a notice of collections from a third party collection agency. Experian can update your credit score to reflect your overdue account but TransUnion and EquiFax would not have that information. These three scores represent a balance for U.S. consumers to have a more accurate representation of how their credit history is impacting their future ability to gain credit. 

Revolving Vs. Installment Credit

Revolving and installment lines of credit are ingrained in the U.S. credit system but should be understood to better understand your credit report. An installment loan is best represented by an auto loan. If you want to borrow money to purchase a car, the auto loan would be for a specific amount of money and repaid over a specific number of payments. Revolving credit is best represented by a credit card. When you open a credit card, you are given a limit within which you can borrow money. Spending money using the credit card will reduce the amount of available credit.

While it may seem trivial to discuss these two types of credit, each impacts credit score in unique ways. Installment loans are perfect for very large, predictable purchases like cars and homes. Installment loans typically come with lower interest rates due to the length of the repayment and some have credit penalties for paying off the loan early. 

Revolving credit, on the other hand, can be helpful for quick, unexpected purchases. However, due to the volatile nature of revolving credit, many come with variable and extremely high interest rates should you not pay on time. If not used wisely, these can quickly lead you into a “debt trap.” Debt traps are when money can be used without any immediate repercussions. Because no money leaves your account immediately, you may fall into the trap of spending more than you can pay back. 

Medical Debt In 2023

The last important note to make about credit scores is that regulations and policy updates can also impact how your score is calculated and what debts get reported. In 2023, Americans can expect most medical debt to be removed from their credit reports. Medical collections tradelines less than $500 will no longer be reported on consumer credit reports. The Consumer Financial Protection Bureau, who spearheaded this change, found that medical bills under $500 are significantly more likely to remain on a credit report for longer than medical bills over $500.

Understanding consumer credit, credit scores, the credit cycle, and other important financial topics can be daunting but the factors named above make up the crux of how your credit score is calculated and reported. Understanding these factors will help you make better financial decisions for years to come.

Additional Resources

If you want to learn more about financial literacy or your rights as a consumer, please visit the Receivables Info Resources Page.

Have an idea for a Money Chat topic?

We want to hear from you! If you have a suggestion for a future Money Chat topic, please email us at [email protected].

The information contained in this article is meant to serve as general guidance for consumers and not meant to serve as comprehensive financial advice. For questions about your individual circumstance, finances, or accounts, please contact your creditor(s) and/or financial advisor directly.

Thank you to our Sponsor Frontline Asset Strategies

Founded in 2008, Frontline Asset Strategies is a nationally licensed and bonded full-service collection agency specializing in accounts receivables management solutions that assist clients with maximizing the recovery of delinquent and non-performing accounts. The Frontline Asset Strategies team works with integrity and transparency to deliver positive consumer interactions that exceed expectations. They are headquartered in Roseville, MN with an additional location in Jacksonville, FL.

Published On: October 11th, 2022|Categories: Money Chat|Tags: , , , , , , |

Related Posts