Key takeaways

  • Credit worthiness is your ability to borrow money
  • A good credit score of 720 or more tells lenders you can be trusted with credit
  • Your credit score is based on five key factors
  • Your credit report lists your current and recently-closed accounts and payments
  • Check your credit report regularly — it’s free!

While it can feel like a mystery, unraveling the secrets behind credit is easier than you might think. Put simply, your credit score is an assessment of how reliable a lender or creditor views your ability to repay borrowed money – whether for an auto loan, a mortgage, or something more basic like monthly payment plans for a cell phone. 

Understanding what determines good (or bad) credit scores might give insight into new possibilities for improving your own.

Being smart about debt

All debt isn’t inherently bad. When used responsibly, it can be a great tool to help you achieve your financial goals. For example, buying a home, investing in continuing education, or paying for your kid’s college are all smart ways to use debt to your advantage.

However, debt can put a damper on your financial journey if used irresponsibly. If you find yourself buying things you can't afford or don't need on credit—like a lavish vacation or an expensive pair of shoes—then you might want to remind yourself what you're ultimately trying to achieve. If it helps, look at it this way: your tan will fade, and your shoes will wear out, but your debt will remain until you pay it off. Make sure your spending has a plan to keep yourself on track for what matters most.

Are you a good credit risk?

When a lender extends credit or takes a financial risk, they have one question: Will you make your payments on time? Ultimately, all they want to know is if you’re a good credit risk. If you are, they will likely approve your application. If you’re not, they will either offer you an outrageous interest rate or deny your application.

So what does the approval process entail? They judge your creditworthiness by examining your credit report and credit score. 

  • Your credit report shows your history of paying back loans and other financial obligations.
  • Your credit score sums up your credit history and current debt situation into a three-digit number.

That number can govern:

  • Whether a lender will give you a loan
  • The interest rate you’ll pay on that loan
  • Your ability to qualify for a credit card
  • Your ability to rent an apartment
  • Your ability to get a job (in 40 states and DC)

Your credit score

Your credit score is also known as your FICO score, named after the firm that invented it. FICO scores typically range between 300 and 850. (VantageScore also uses the same scale).

A score over 720 is considered good. If your score is above this threshold, chances are you’ll qualify for loans or credit cards and pay the lowest rates. 

*In some cases you may need a higher score to qualify.

The five factors that include your credit score

Your FICO score is calculated using these five pieces of information: 

  1. Your credit history (how long you’ve had it)
  2. Your credit mix (different types of accounts)
  3. How much you owe (total, across all types)
  4. Your payment history (on-time, late, or delinquent)
  5. Your amount of new credit (recent credit inquiries, new accounts, and the age of your most recent account)

So, how do you maintain a healthy credit score? By paying your bills on time, keeping your balances low, and showing you can manage different types of accounts.

Where the information comes from

Most of the businesses you pay—banks, credit card issuers, or utility companies—report your payments to three major credit bureaus: Experian, Equifax, and TransUnion.

These reporting agencies do two things:

  • Collect data from creditors and other sources
  • Analyze that data to prepare credit reports and judge creditworthiness

What is a credit report?

A credit report is a record of your credit history, including your current and closed accounts. It lists accounts, on-time and late payments, amounts borrowed or owed, and anything else tied to your financial life.

Even when an account is closed, it remains on your account for up to seven years. For bankruptcies, that duration climbs to ten years.

A significant percentage of credit reports contain errors, and the federal Fair Credit Reporting Act (FCRA) includes a way for consumers to review and request corrections to their credit reports. The Consumer Financial Protection Bureau (CFPB), another federal agency, also has helpful resources.

Check your credit score regularly (it’s free!)

The government requires that you have access to a free copy of your credit report once a year. To spot errors or possible fraud (e.g., identity theft), we recommend requesting a credit report from one of the three credit bureaus every four months. You can request your free credit reports at This is the only official site authorized by federal law.

Facet has many resources to help you understand and manage your credit and debt. If you have additional questions or want to make a plan to increase your creditworthiness, schedule time to talk with a CFP® professional today.