Your credit score can affect whether you qualify for a loan, the interest rates you’re offered and whether you qualify to rent an apartment. TD offers insight into what factors into your score, why it may change, and simple steps that can help you build and protect your credit.
Key Points
- A credit score is a three-digit number assigned by the U.S. credit bureaus, often ranging from 300 (low) to 850 (high), that primarily helps lenders determine how likely you are to repay borrowed money.
- The credit bureaus usually base credit scores on five things: payment history, how much credit is being used, how long you’ve had credit, whether you’ve opened new accounts and the type(s) of credit.
- A credit score can change even if you haven’t applied for new credit or neglected to pay. A higher credit limit, a closed account or a change in reported balances can all move your score.
- Paying bills on time, keeping balances low and maintaining older accounts can help strengthen credit scores over time.
- Review your credit reports regularly to help catch mistakes, spot fraud and protect your score.
Your credit score can influence the cost of major expenses, such as a car loan or mortgage, as well as everyday services you may not expect, like insurance or cell phone plans. In some industries, it may also affect your ability to qualify for a job.
Credit scores can be difficult to understand because they often change without an obvious reason. Mandy Kelso, Head of Financial Education at TD Bank U.S., explained how credit scores work, what can affect them and steps you can take to help improve yours.
What is a credit score?
A credit score is a three-digit number that helps lenders decide how likely you are to pay back money you borrow and can indicate responsibility to landlords and employers. In the U.S., the typical credit score range is from 300 to 850.
Your score is based on information in your credit reports from the three major credit bureaus: Experian®, Equifax® and TransUnion®. Since lenders may report different information to each bureau, your score may vary slightly depending on which bureau you check.
FICO® is one widely used type of credit score created by the Fair Isaac Corporation. All FICO scores are credit scores, but not all credit scores are FICO scores.
Credit scores are generally based on five key factors:
- Payment history
- Credit utilization, or how much available credit you use
- Length of credit history
- New credit activity
- Credit mix
Paying on time and keeping credit use low tends to have the biggest impact. Over time, these habits can help improve your score, which may make it easier to qualify for a car loan, mortgage or credit card. A stronger score may help you secure a lower annual percentage rate, or APR, reducing both your monthly payment and the total borrowing costs.
Your score may also influence your credit card interest rate and home or auto insurance costs, as providers may factor credit history to help assess risk.
Why can your credit score change?
Your credit score can change for reasons that may not be obvious. For example, your score could improve if your issuer raises your credit card limit while your balance stays the same. This means you are using a smaller share of your available credit, which can help boost your score, even if you did not change your spending or significantly pay down the balance in that period.
The opposite can also happen. If a bank closes an inactive account, you may have less available credit, and the average age of your accounts, or the number of years they’ve been open, may decrease. This could cause your score to decrease, especially if the closed account was one of your oldest.
"Scores can also vary because credit bureaus and scoring models may use different information or calculations," Mandy said. "That is why checking all three credit reports can give you a fuller picture of your credit history."
You can check your credit score by creating an account with each credit bureau or using a free credit score website. Some banks, credit card companies, lenders and nonprofit credit counselors also offer credit score tools. TD clients can access free credit scores, credit planning tools and more through the TD Online Banking portal.
How can you improve a credit score?
Improving your credit score usually starts with a few simple habits: Pay bills on time, keep balances low, use a limited number of credit cards and loans, and check that the information on credit reports is accurate.
Late or missed payments can hurt your score, especially if they are more than 30 days past due and reported to the credit bureaus. If a late payment appears on your credit file that you believe is inaccurate, contact the credit bureau and the company that reported it, and provide proof of payment.
Using less of your available credit can also help. This is known as credit utilization, which compares how much credit you are using with how much is available. Mandy recommends keeping your credit card balance below 30% of your credit limit.
If you are trying to establish or rebuild credit, some Community Development Financial Institutions, or CDFIs, may offer credit-builder loans. These loans are designed to help borrowers build a history of on-time payments that may be reported to the credit bureaus.
If you are trying to build or rebuild credit, a secured credit card can also be a good place to start. Renters may also be able to use rent payments to build credit.
Ask your landlord or look into third-party services that report eligible rent payments to the credit bureaus. Before signing up, review the costs, terms and which credit bureaus the service reports to. Some programs may also let you add utility, phone, internet or cable payments to your credit history.
It is also important to remember that your home's value, or the amount of equity you have in it, does not directly determine your credit score.
"Credit scores are really about what is being lent to you, how often you’re paying it back, how much of your available credit you’re using and who is keeping score,” Mandy said.
How can a credit card impact your credit score?
Applying for a credit card may cause a small, temporary dip in your score, but your long-term habits matter much more, said Scott Adamo, Head of Franchise Unsecured Lending, TD Bank U.S. Paying on time, keeping balances low compared with your total credit line and maintaining accounts in good standing can all help strengthen your score.
"The card itself isn't good or bad, it's how you use it," Scott said.
How can you protect your credit score?
A sudden change in your score can be a good reason to review your credit reports. Look for incorrectly reported payments, closed accounts or unfamiliar accounts. Errors and potential fraud are easier to address when you catch them early.
A credit freeze, also known as a security freeze, can help prevent someone from opening new accounts in your name. Credit freezes are free and they must be placed separately with each of the three major credit bureaus. When you need to apply for credit, you can temporarily lift the freeze or remove it completely.
Why does a credit score matter?
Even if you’re not planning to borrow money now, your credit score can matter later. You may want to buy a home, finance a car, start a business or act on an unexpected opportunity.
“Life is messy, and opportunities can come out of nowhere,” said Mandy. “We want to make sure you're in the best position to take advantage of them should they come.”
A good credit score is one of your most valuable financial assets, Mandy said. Monitoring it regularly and building habits that protect it can help strengthen your overall financial security, one of the keys to a better life.
"Financial security gives people the confidence and flexibility to handle life’s challenges, pursue opportunities, and focus on what matters most without the constant stress of financial uncertainty," Mandy said.
FAQs to help understand credit scores
What is a credit score?
A credit score is a three-digit number assigned by one or more credit bureaus that helps lenders decide how likely you are to pay back borrowed money. Scores typically range from 300 to 850.
How can I increase my credit score?
You can help improve your credit score by paying bills on time, keeping balances low on credit cards and lines of credit, checking credit reports for mistakes and keeping older accounts open when possible. Those without much credit history may be able to generate a score by reporting eligible rent and utility payments.
Why do credit scores change so often?
A score can change when reported balances, credit limits, account status (late payments, closed account, etc.), a new credit application or credit history change. For example, a higher credit limit may help if your balance stays the same, while a closed account may reduce your available credit. Banks and other lenders share these factors with the credit bureaus monthly or periodically, causing changes.
How can I keep my credit safe?
Check your credit reports regularly for errors or unfamiliar accounts. You can also place free credit freezes with Equifax, Experian and TransUnion to help prevent someone from opening new accounts in your name.
Do credit cards help or hurt your credit score?
A credit card or secured card are common ways people can build a credit score if it is used responsibly by paying on time and keeping the balance low compared with your credit limit. Mandy recommends keeping your credit card balance below 30% of your credit limit.
Missing payments, carrying high balances or applying for several cards in a short period can ding a credit score.
TD has options for credit cards, including TD Double Up Credit Card and TD Cash Credit Card , designed to suit different financial situations.