What is a Credit Score?

Find Out What's In Your Credit Report

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Ever feel you're just a number? Well, of course you're not; but you are just a score -- a credit score. Your credit score determines if you will ever own your dream home or drive your fantasy car. Creditors use this number as a predictor of how likely you are to pay your bills; and thus decide whether to lend you money -- and at what interest rate.

Credit reporting agencies, also known as credit bureaus, are one of the most powerful influences in your life. The three main bureaus, Experian, Equifax and TransUnion grade every consumer's credit worthiness using a complex formula to arrive at a number ranging from around 300 (very bad) to almost 900 (very good) -- This is your credit score. FYI: The average American has a score of about 720.

Your credit score consists of:

  1. Payment History (35%)
    This is your track record. It measures the length of time you've had a positive credit history as well as how long it has been since your most recent negative item. If you pay your bills on time, your score goes up; if you pay late, your score drops;

  2. Amount Owed (30%)
    How much outstanding debt do you have? What is the ratio of your credit balances vs. your available credit? If you use only 10% of your available credit, your score will be higher than if you tie up a big chunk of your credit line;

  3. Length of Credit History (15%)
    How long have you had a credit history, and how long have individual accounts been open? Having a long, active credit history shows how well (or how badly) you have handled debt over a period of time. Seven years of credit accounts in good standing is much better than three years;

  4. How Much New Credit Do You Have? (10%)
    Here, the credit bureaus are checking to see how many new credit accounts you have, and how much time has passed since you opened one. They are also interested in how many times you've recently requested credit, which shows up on your credit report as lender "inquiries." Too much new credit makes lenders nervous and can drop your credit score;

  5. Type of Credit (10%)
    Creditors like to see a "healthy" mix of installment (e.g., car, home) and revolving (e.g., credit cards) credit accounts. A car or home is considered "good debt," because it involves set payments over a fixed term; and the product can be taken back by the creditor if you don't pay. Credit cards don't have fixed payments, and balances may fluctuate wildly, so creditors feel insecure if you have too many of them;

    6. At this point you're probably asking: "How do the credit bureaus get all this information about me?" People with whom you do business send it to them. Every time you buy on credit, pay a credit account, or ask for credit, it's reported to at least one of the three bureaus. Your credit score is always changing, so good scores can turn to bad (and vice versa) very quickly.

    Protect yourself and know the score! Understanding, monitoring, and maintaining your credit score will help you obtain the better things in life -- at least the ones you buy. Take care of your credit, and it will take care of you!