Credit Scores Demystified: How They Work, Why They Matter, and How to Improve Yours

Your credit score is more than just a number. It can determine whether you get approved for a mortgage, car loan, or even rent an apartment. With an average credit score of 715 in America in 2025, there are many people who can improve on their credit score, and usually pretty easily! The biggest issue that not everyone understands what makes up their score or how everyday decisions influence it. In this guide, I’ll break down how credit scores are calculated, why they matter, and practical steps for beginners, good-credit holders, and those rebuilding credit.

Well, let’s break it down. A credit score is a 3-digit number (typically between 300 and 850) that summarizes your credit trustworthiness. The most widely used model in the U.S. is FICO, though VantageScore and others also exist.

• FICO bases its scores on data in your credit report from one of the three major bureaus (Experian, Equifax, TransUnion).(Source) 
• The score range (300–850) classifies credit quality (e.g. “poor,” “fair,” “good,” “very good,” “excellent”).(Source) 
• While the precise algorithm is proprietary, FICO has publicly shared rough weightings of key factors.(Source)

The way that companies see it, credit scores are used to predict the likelihood that you will miss payments or default. Lenders, insurers, landlords, and even some employers use them to assess risk. From that point of view, if you want to see a higher level of trust and improvements on contract terms, in some specific types of contracts, improving your credit score is a great place to start. 

There are the five major factors that affect your score and how much influence they carry varies between them (for many FICO models):

Other models (like VantageScore) may weigh these differently or consider additional data.(Source) 

As I mentioned in the beginning, credit scores are used by businesses to decide how much they trust you. Better credit scores lead to more trust which leads to better deals.

This can show up in the form of:

• Loan approvals & interest rates: A higher score often translates to better interest rates and loan terms. 
• Housing & rentals: Landlords and property managers frequently check credit scores during screening. 
• Insurance premiums: Some insurers use credit-based insurance scores in setting rates.
  
• Employment & security checks: In certain industries, employers or contractors may view credit reports (not always score) as part of background checks.
  

An easy example of how this can make a big difference in your day to day is when you are buying a car. Interest rates on loans to purchase a car can vary anywhere from 6 to 21%. According to some sources, a credit screen of 680 vs. 500 could be the difference of a 5% loan to a 20% loan. (Source) With the average car price in 2025 being $50,000 and the average down payment of 20%, you are looking at the difference of $754/month vs. $1059/month! That’s $300 savings per month and total saving of $18000 over a 5 year auto loan just by being conscientious about your credit score.

Regardless of whether you are just starting out with credit or you are a veteran in the field, here are some tips that could help you manage your credit score.

1. If you’re just starting out or have little credit history, you can use a secured credit card or credit builder loan to begin establishing positive payment behavior.
2. Make sure to keep balances low and aim for utilization below 30% (even lower is better). We want to prove that we have a handle on our spending month-to-month.
3. Always pay on time! This is one of the biggest drivers of your score. When it comes to credit cards, I never use more than I have in my checking account, so I know that I can pay my cards off. Similarly with larger loans, make sure you budget your new monthly payments so you can keep up with any additional payments.
4. Sometimes, debt consolidation can be a great way to manage your payments. Depending on how you set it up, this can make everything easier logistically because you only need to make one large payment, rather than worrying about multiple companies to pay off. It can also come with lower interest rates and can show improved credit utilization. Both of these factors play a big role in your credit long term.
5. Be patient. Credit building and management is a test of how you handle your finances over time. Just increase the length of your credit history improves your score over time. The best thing to do is to stay on top of it and be deliberate with each of your loan decisions.

If you already are happy with your credit score and you want to maintain or push that much higher:

1. Stay cautious when opening new account. A new credit line will affect your credit history score (as the average life will go down) and would require you to do a hard pull on your credit. Both of these things can temporarily hurt your credit. On the other hand, an additional card, for example, can also increase your limit and help keep your total utilization down below 30%. 
   
2. You are allowed one free report on your credit per year, apart from soft reporting that banks do for you regularly. Make sure to monitor your score and make sure its trending in the direction you expect and you understand why. Fluctuations in either direction happen, but understanding the reason why and making sure you have a plan to get where you want to be is key.
3. Unless there’s a big reason to close, it’s generally recommended to not close old accounts. They help your credit score tremendously and closing them can have a large affect on your credit age.

For example, I recently closed a credit card I had open from when I first finished college. I was unable to open the account myself, so to help me build my credit history, my father co-signed with me. Now, years later, we decided to do some cleaning up of our respective finances and thought it was a good a time as any to remove him as a co-signer, since I had the history to open my own cards now. Unfortunately, to do so, we had to completely close the card and open a new one. This significantly reduced my credit age and I saw an instant drop to my credit score by 30+ points. It remained stuck there until recently when I opened a new card to replace the old one, starting to build up more credit.

In addition to starting up or maintaining your credit score, it’s common for people to need to rebuild. Life loves to throw us into difficult situations, and with that comes debt, late payments, high interests, and, inevitably, a drop in our credit score.

For those recovering from past credit challenges:

1. You want to prioritize paying down high-interest balances. Reducing revolving debt first will save you a significant amount of capital and make your debt utilization percentage look much better. 
   
2. Setting up autopay is a great way to avoid any missed payment. Consistently paying every statement on time, month after month, is a great way to build trust and improve your score.
3. As tempting as it can be to open a new card so you unlock some more spending powder, avoid doing so in short periods of time. Every time your apply and open a new card, you are doing a hard pull on your credit, you are hurting your credit history age, and you are taking on more debt before fully taking care of your original one.
4. As mentioned before, debt consolidation is a great way to deal with high-interest loans or simply organize a bad situation into something more manageable. 
5. Dispute when necessary! If you see inaccuracies, ask about them and fix them. Every negative point is an easy way for someone to drop in score.

There are some common myths that go around about things to do or not do. I just want to call these out to make sure you aren’t getting caught hurting yourself from bad advice.

1. “Checking your own score hurts your credit.” This is false. A a “soft” pull on your credit is when you are getting pre-qualified for loans, starting a new job, or simply checking on your score. These do not hurt your score. However, a “hard” pull is when you actually apply for a loan or credit card, which does have the chance to the effect your credit.
   
2. “Carrying a balance helps your score.” This is false. Credit score is a trust score. If you are constantly in debt or constantly getting late fees or going near your peak utilization, this can negatively impact your score. It’s easiest to just have your whole statement on autopay, avoid any late fees or constant balance.
3. “Closing old accounts always helps” This is actually the opposite of what you want to do. As I mentioned in my example above, closing my account reduced my credit history and my utilization limits, both hurting my credit score. I am currently working on building this history back up with my old card and my newest addition this last week. Unfortunately, it’s going to take some time to build this up again since my first card had such a long history attached to it.

A strong credit score isn’t built overnight, but each positive habit compounds over time. Whether you’re a beginner, in the middle, or actively repairing your credit, focusing on on-time payments, low utilization, and longevity of accounts will move the needle.

Start by pulling your free credit reports today, identify what holds you back, and build a credit improvement plan you can stick with. Over years, that disciplined path can unlock lower borrowing costs, premium financial products, and greater flexibility in life.

Key Takeaways

• What They Are: A 3-digit number (300–850) used to measure your creditworthiness.

• How They’re Calculated: Based on payment history, credit utilization, length of credit history, credit mix, and new credit inquiries.

• Why They Matter: They influence loan approvals, interest rates, housing applications, insurance, and sometimes even jobs.

• Best Practices: Pay on time, keep balances low, maintain older accounts, and check reports regularly.

• Common Myths: Checking your own score hurts it (false), carrying a balance helps (false), closing accounts always helps (false).

Take a look at our forum for more discussion around the topic! We would love to hear your voice as well.