How Do Your Credit Report and Scores Work?

Written by Banks Editorial Team
3 min. read
Written by Banks Editorial Team
3 min. read

Sponsored By

You hear the term “credit” used a ton in conversation and are aware that it refers to borrowing money from a lender or creditor. But maybe you aren’t quite sure how credit scores are calculated, why they’re so significant, what it takes to build credit or where you can check your credit score. 

In this guide, you’ll learn how credit works and the answers to these important credit-related questions.

Monitor and Improve Your Credit Score

What is a Credit Score?

A credit score is a three-digit number that provides insight into your creditworthiness. It is calculated using the information in your credit report. 

Approximately 90 percent of creditors and lenders use the FICO score, which ranges from 300 and 850) to make lending decisions. Here’s how scores are categorized: 

  • Exceptional credit score: 800 – 850 
  • Very good credit score: 740 – 799
  • Good credit score: 670 – 739
  • Fair credit score: 580 – 669
  • Poor credit score: 300 -579

Reasons Why Your Credit Score is Important

The most competitive financing terms are generally reserved for borrowers with credit scores of 670 or higher. Once you reach 740, your approval odds and ability to qualify for the best credit card and loan products on the market are even higher. 

Beyond lower interest rates and favorable loan terms, credit matters for several other reasons: 

  • You could get a lower auto insurance rate if you live in a state that allows insurance providers to use insurance-based credit scores to assess rates. 
  • You could qualify for deposit waivers on cell phone, cable and utility services. 
  • Your landlord may require a higher deposit if your credit score is low. 
  • You could be turned down for employment if you have an unfavorable credit history. (Note: Employers are prohibited from accessing your credit score but can only view your credit report to make a hiring decision). 
  • You could save a fortune in interest and use the funds to meet other important financial goals instead. 

How Do Credit Scores Work?

Your FICO score is based on these factors: 

  • Payment history (35 percent): Do you pay your bills on time? Lenders and creditors can report late payments once an account has been delinquent for 30 days or more. Late payments mean bad news for your credit score and can remain on your credit report for up to 7 years. Collection and charged-off accounts can do even more damage and should be avoided at all costs. 
  • Amounts owed (30 percent): Your credit utilization plays a significant role in your credit health. It’s the percentage of your credit limit in use on each of your credit cards. Try to keep this figure at or below 30 percent to give yourself the best chance at a strong credit score. 
  • Length of credit history (15 percent): This category considers the average age of your credit accounts and the amount of time you’ve used credit. 
  • Credit mix (10 percent): Do you have a balance of revolving (i.e., credit card) and installment (i.e., loans) accounts? This is how your credit mix is determined. 
  • New credit (10 percent): Hard inquiries, which appear on your credit report each time you apply for financing, can hurt your credit score by a few points. Too many hard inquiries in a short period could cause more damage. Furthermore, potential lenders and creditors could view you as a credit risk. 

Monitor and Improve Your Credit Score

How Do You Build Credit?

There are several ways to improve your credit score. Start by reviewing your credit report for errors and file disputes with the credit bureau(s) reporting the inaccurate information promptly. 

You should also highlight any negative entries, so you’ll know what’s dragging your credit score down and devise a plan to fix it. This could include bringing any past-due accounts current to prevent more late payments and avoid the accounts being charged off. If you have collection accounts, it’s worthwhile to negotiate a pay-for-deletion agreement with the creditor or collection agency reporting the delinquency. 

Below are some other ways to boost your credit health: 

  • Pay your bills and outstanding debt obligations on time. 
  • Get current on all past-due accounts. 
  • Keep your credit card debt at or below 30 percent. 
  • Monitor the activity in your credit report through a free service, like Credit Sesame
  • Don’t close old credit accounts. 
  • Only apply for new credit as needed. 

If you’re new to credit or have a little credit history, consider a credit-builder app to jumpstart your journey to stellar credit health. The Sesame Cash Builder lets you build credit through everyday purchases with your own cash1. There are no credit checks or fees, and you can access your cash at any time. 

Here’s how it works:

  • Open a fee-free Sesame Cash account
  • Deposit funds from your Sesame Cash account to the credit builder. 
  • Credit Sesame will open a virtual Secured Credit Card and set the utilization you prefer. For example, if you deposit $300 and set the utilization at 20 percent, you’re permitted to spend up to $60.
  • Make everyday purchases, as usual, using your Sesame Cash debit card. 
  • Credit Sesame will take a portion of your purchases, add them to your virtual Secured Credit Card and report timely payments to the credit bureaus.

Plus, you’ll get paid up to $10 if your credit score increases by 10 to 99 points in 30 days2.

Where Can You Check Your Credit Score?

If it’s been a while since you’ve checked your credit score, you can download the Credit Sesame app and know where you stand in seconds. It’s free to create an account, and you’ll also have access to an assortment of features and tools, including the fee-free Sesame Cash debit card3, credit builder, direct deposit up to 2 days early4 (with a Sesame Cash account), identity theft protection, daily credit score updates5 and more. 

Credit Sesame

You may also like

Read some tips on how to increase your credit score to 800 points to qualify for the best terms on credit card and loan products.
Read more

Advertisement Disclosure

Product name, logo, brands, and other trademarks featured or referred to within are the property of their respective trademark holders. This site may be compensated through third party advertisers. The offers that may appear on’s website are from companies from which may receive compensation. This compensation may influence the selection, appearance, and order of appearance of the offers listed on the website. However, this compensation also facilitates the provision by of certain services to you at no charge. The website does not include all financial services companies or all of their available product and service offerings.