In personal finance, few metrics wield as much influence as your credit score. This three-digit number can unlock financial opportunities and significantly impact your everyday life.

Understanding how your credit score works and how to build (and protect) a good credit score is essential to reaching your financial goals. 

Why your credit score matters

Your credit score serves as a crucial indicator of your financial health. It provides lenders with insights into your creditworthiness and influences their decisions when extending loans or credit cards. 

Every lender sets their own lending requirements, but generally speaking, a good credit score can open doors to favorable loan terms and lower interest rates, while a poor score may limit your access to credit or result in higher borrowing costs.

How is your credit score determined? 

Credit scores are like a snapshot of your financial behavior. The most common model, the FICO credit score developed by the Fair Isaac Corporation, uses this model to calculate your three-digit number:

• Payment history: 35%
• Amounts owed: 30%
• Credit history length: 15%
• New accounts: 10%
• Type of credit used: 10%

Understanding how these factors impact your score is essential for managing your finances effectively.

What is a good credit score?

Under the FICO model, these ranges are generally considered excellent to poor:

• 800-850: Excellent
• 740-799: Very good
• 670-739: Good
• 580-669: Fair
• 300-579: Poor 

However, these ranges can differ from one lender to another. Since lenders set their own ranges, some may consider 650 a ‘good’ credit score, while others may consider 700 and above to be ‘very good’. Regardless of these nuances, the goal is to keep your credit score as high as possible by making smart money moves like paying your bills on time and keeping your debt low. 

Your credit score goes beyond borrowing money  

While we often think of credit scores when you apply for a credit card or loan, your score can have far-reaching implications:

• Rental applications: When you're looking to rent a home or apartment, landlords often conduct background checks, which may include a review of your credit history.
• Insurance premiums: Those with better credit scores may qualify for lower insurance premiums on policies such as auto, homeowners, or renters insurance.
• Employment: For some industries and roles, employers may conduct credit checks as part of the hiring process.
• Utility services: When setting up utility services such as electricity, gas, or water, utility companies may check your credit history. A good credit score may allow you to avoid paying a security deposit.

Your credit score is a powerful tool that can shape your financial future. By understanding its importance and how it's calculated, you can take proactive steps to improve your score and achieve your financial goals.