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How are credit scores calculated?

A higher balance can affect your credit utilization ratio, which is how much you owe versus your available credit. Many experts recommend keeping this under 30%. So, the higher your utilization, the more likely it will negatively impact your credit score.

Technically, you don’t have just one credit score. There are three nationwide credit bureaus: Equifax, TransUnion and Experian. While each uses the FICO scoring model, each has their own statistical models, so your score will differ slightly between the three.

Each can provide you with an annual credit report, though they don’t provide a “score.” You can check your credit score with a credit score service; it could also be possible to get a credit score from your bank or credit card company.

A credit score is determined by several factors, such as:

  • Payment history, which is how consistent you are with on-time payments
  • Credit utilization rate, which is how much you owe versus your available credit
  • Credit history, which is the amount of time you’ve been using credit
  • New credit, which is how recently (or how often) you’ve applied for new loans

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Why are credit scores so important?

Your credit score impacts your financial future. “Companies use credit scores to make decisions on whether to offer you a mortgage, credit card, auto loan, and other credit products, as well as for tenant screening and insurance,” according to the Consumer Financial Protection Bureau (CFPB). They’re also used to determine your interest rate and credit limit.

So, if in the future you plan to buy a home, start a business or make a major purchase, a low credit score could put a damper on your plans. Even if you’re approved for a loan, a low credit score could mean you’ll have to pay a higher interest rate, since you’re considered a higher risk for the lender.

If you want better terms on future loans, then you’ll want the highest score possible on the scale, which ranges from 300 (“very poor”) to 850 (“excellent”).

It’s a good idea to check your credit report from each of the three nationwide credit bureaus annually to make sure your information is correct and there aren’t any errors that could be impacting your score. You can request your free credit report at annualcreditreport.com.

You can also use this information to change your spending behaviors — such as not carrying a balance — and improve your overall credit score.

But it boils down to this: To boost your credit score (and simultaneously avoid interest charges), pay off your credit card balance in full as before it's due — if it's feasible for your financial situation.


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Vawn Himmelsbach Freelance Contributor

Vawn Himmelsbach is a journalist who has been covering tech, business and travel for more than two decades. Her work has been published in a variety of publications, including The Globe and Mail, Toronto Star, National Post, CBC News, ITbusiness, CAA Magazine, Zoomer, BOLD Magazine and Travelweek, among others.

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The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.