What Is A Credit Score?

Written by: Phil Sheridan

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Dealing with your financial health can be like dealing with your physical health. Before you can fix it, you have to know what the problem is. A lot of people would rather not know than make that first visit to the doctor and find out what’s wrong.

Your credit score is an important measure of your financial health. The good news is that you don’t need a doctor to tell you what it is. You can take care of that yourself, and the more often you do, the better chance you have of avoiding serious problems with your finances.

The most used credit score is called a FICO score, which comes from “Fair Isaac Corporation,” the company that created the formula on which the scores are based. FICO scores are used in 90% of lending decisions made.

Your FICO score is calculated using information available on your personal credit report. The relevant information includes:

  • Payment history
  • Outstanding balances
  • Length of credit history
  • Types of credit accounts
  • Applications for new credit accounts

Credit bureaus Experian, TransUnion and Equifax compile the required information and provide reports to lenders.

Your credit score gives those lenders a snapshot of how responsibly you use credit and whether that makes you a good risk for a loan or a line of credit. The higher your FICO score, the better your chances of being approved for a car loan, a mortgage or a credit card.

Why Does a Good Credit Score Matter?

Your credit score can affect you in matters large – mortgage, car loan, credit cards – and small. The smaller matters, such as your ability to obtain rental housing, rent a car or even insurance rates, can have a real impact on your everyday life.

Meanwhile, a good credit rating can lead to opportunities and perks such as lower interest rates and fees. Lenders and retailers seek out customers with strong credit ratings.

Those opportunities are scarce for consumers struggling with a poor credit score.  They are considered higher-risk borrowers, with fewer lenders competing for their business. When lenders do advance credit to such borrowers, it can be at lower amounts and much higher annual percentage rates (APRs).

It’s a vicious circle, best avoided by staying aware of your credit score and doing what you can to maintain a good credit rating. Once you’re in that downward spiral, the best way out is to improve your credit score.

What Does My FICO Credit Score Consist Of?

Your all-important FICO credit score is not just a random number. It represents a formula created to provide a snapshot of your current financial health. That formula includes five major components:

  • Payment history (35% of score): Credit bureaus maintain a record of whether you paid bills on time or fell behind on payments.
  • Amounts owed (30% of score): How much debt do you currently hold, and how likely are you to be able to keep pace with payments?
  • Length of credit history (15% of score): How long you’ve maintained good standing or fallen behind on paying debts is a major factor in determining your overall reliability.
  • Credit mix (10% of score): What kinds of debt you’ve amassed matters: a mix of housing, credit cards, auto loans and student loans shows a different level of responsibility than a similar debt load with just one or two creditors. Balance and variety of debt are weighed in the credit score formula.
  • New credit (10% of score): A relatively high percentage of newly acquired debt – credit cards, car or rent payments – can raise a red flag for credit agencies.

Tips to Increase Your Credit Score While in the Military

Joining the military doesn’t magically erase financial burdens, but there are protections in place to prevent your service from creating new problems or making existing problems worse. Knowing and using those protections may help you to improve your credit score while serving in the military.

The Servicemember Civil Relief Act (SCRA) is a law that limits the interest rate on debts and credit obligations incurred before active military service. The ceiling on such pre-service debts is 6%. Interest above 6% is permanently forgiven.

Other tips to improve your credit score while serving in the military:

  • Arrange your finances before beginning active duty. Your Personal Financial Manager can help set things up so your obligations are met while you serve.
  • Your PFM and you can set up automatic bill pay programs. You are allowed a maximum of six discretionary allotments to handle obligations such as car loans, mortgages, student loans and credit card payments.
  • Give someone you trust, a spouse or parents, access to your credit accounts so they can deal with problems that arise in your absence.
  • Set up an active duty alert to monitor and protect your accounts.
  • Before deployment, be sure your credit cards are likely to be accepted in the country you’ll be in, and whether there are additional fees for using your cards. Search “widely accepted credit cards” along with the name of the country to find out.

Additional Tips to Increase Your Credit Score

The best strategy for building a strong credit score is to manage debt responsibly over time and avoid negative reports. The same is true for rebuilding your credit score after it has been damaged. There are ways to repair your credit history and score.

  • Check your credit report for errors, and dispute any inaccuracies or missing information. Contact the credit bureau and your lender to correct any errors.
  • Pay bills on time. Sounds obvious, but the first step toward repairing your credit history is avoiding new problems. If you have missed payments, get current and stay current.
  • Reduce your current debt. Pay off credit cards when able rather than shifting debt from one card or loan to another.
  • Keep balances low on current credit cards and do not open new accounts in an effort to improve your credit score. New credit cards can actually lower your score.
  • Consider a non-profit credit counselor to help you manage your debts. Seeking assistance from a credit counselor will not affect your FICO score.

Review Your Credit Reports

Banks and other prospective lenders have access to your credit reports, so make sure you review the information that could influence your ability to obtain credit.

There are three major national credit bureaus: Equifax, Experian and TransUnion. Go to each bureau’s website and pull up a copy of your current credit report. This is the most direct way to learn what is helping your credit score and what is bringing that score down.

You can check your credit reports for free once a year through the official AnnualCreditReport.com website.

Get a Handle on Bill Payments

A basic way to maintain or improve your credit score is to avoid late payments on your bills. If you look back on this paper, you’ll note that 35% of your total score is based on bill payments.

Organization is a good way to get control of your monthly bill payments.

  • When possible, set up automatic bill payments from your bank account. This ensures that the bill is paid on time without the worry that you’ll overlook the due date. It is important to make sure your bank balance can cover the payments.
  • Create a filing system for keeping track of all your monthly bills. This can be done on paper or digitally.
  • Set due-date alerts, so you know when payments are coming up.
  • Work with lenders to arrange payments that are spread out across the month, avoiding a cluster of payments coming due at the same time.

Aim for 30% Credit Utilization or Less

One factor to consider is how much you owe in relation to your total credit limit. One good rule of thumb is to keep your total outstanding balance at 30% or less of your credit limit. For example, if you have a credit card with a $1,000 limit, do not allow your balance to exceed $300.

After you become comfortable with the 30% limit, the next step is to reduce your balance to 10% or less. That level of debt is considered ideal for improving your credit score.

Paying down your balance is the ideal way to improve your credit utilization status. But raising your credit limit is another possibility. Ask your lender to raise the ceiling, but try to keep the balance at the same level. Adding to your balance after raising the credit limit can leave you right back where you started.

Limit Your Requests for New Credit

Your amount of new credit accounts and applications can affect your credit score directly – it represents 10% of your FICO score – but they can translate into troublesome inquiries into your credit history.

There are two types of inquiries. A hard inquiry occurs when you apply for credit or a loan. A number of hard inquiries in a short period of time can damage your credit score for as much as two years, though a single inquiry is unlikely to have much effect. According to Experian, a hard inquiry may result in a 5-point drop in your FICO score.

A soft inquiry, as for an account review or a pre-approved offer, has no effect on your credit score.

Make the Most of a Thin Credit File

There are good points to having a thin credit file, but it can also present a challenge. It may mean you have incurred little or no debt, but it also means you don’t have enough credit history to generate a credit score.

One solution to this problem is to build a favorable credit history slowly and steadily. If that isn’t practical, there are other solutions available:

  • Experian Boost is a service from the credit bureau that promises to “raise your FICO score instantly” by including such factors as a cellphone plan, utility payments and streaming subscriptions in your credit score.
  • UltraFICO is a similar service that promises there are 15 million Americans with a thin credit file who can obtain a FICO score by adding other factors to the equation.
  • Rental Kharma and RentTrack are companies that report your rent payments to the three credit bureaus on your behalf, allowing you to get credit for your financial responsibility on your credit report.
  • Perch is a company with a mobile app called Altro which reports rent and other monthly payments and subscriptions to credit bureaus free of charge. The reports can help fatten up a thin credit file.

Keep Old Accounts Open and Deal with Delinquencies

The opposite of a thin credit file is a full file that shows long experience with managing credit and debt. Old credit accounts, even ones that you are no longer using, are proof of your experience.

That’s why you shouldn’t close accounts that you aren’t currently using. Those accounts remain part of your credit history whether you close them or not, so it is more beneficial to keep them open.

Another benefit: Closing accounts lowers your available credit total, which can increase your credit utilization ration, and that is detrimental to you credit score.

If there are delinquencies or unresolved problems with old accounts, it is best to resolve them. Otherwise, negative information can remain on your credit history for up to seven years. Bankruptcies remain on your history for 10 years.

Consider Consolidating Your Debts

 If your debts seem to be running wild and impossible to get under control, the answer may be to put them all in one place through debt consolidation.

Basically, that means taking out a debt consolidation loan from a bank or credit union, which pays off all your outstanding debts. That leaves you with one regular monthly bill to pay instead of keeping track of multiple credit cards, loans and other monthly bills.

Use Credit Monitoring to Track Your Progress

It is a good idea to keep track of your personal credit report, but that may not always be practical. There is help available in the form of credit monitoring services, which keep track of how and when your credit score changes.

These services are often free, but can range up to $40 a month. The free services will monitor for changes in your credit report, such as a paid-off account or a new account that you’ve opened.

That monitoring can also alert you to identity theft and fraud. If you didn’t open that new account, but it is in your name, a monitoring service can inform you before further damage is done. Some of the paid credit monitoring services offer insurance against identity theft.

Other Credit Considerations

When you begin work on your credit profile, it’s natural to expect results. But patience is important. It can take weeks, even months, to see a noticeable impact on your credit score. You’re turning an aircraft carrier, not a patrol boat.

But you have to start somewhere, and these 8 tips for improving your credit score are a good place to do that:

  • Review your credit reports.
  • Get a handle on bill payments.
  • Try to keep your credit utilization at 30% or less of your limits.
  • Limit your requests for new credit.
  • Work to fatten up a thin credit file.
  • Keep old accounts open and deal with delinquencies.
  • Consider debt consolidation to pay off credit cards.
  • Use credit monitoring services to keep track of your credit report and avoid credit repair scams.

About The Author

Phil Sheridan

Phil Sheridan writes about military benefits for Military Money. Phil spent over 30 years learning about labor negotiations, salary caps, stadium negotiations and a lot of other finance-related matters as a reporter and columnist for the Philadelphia Inquirer and ESPN.


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