Your Credit Score

When you've made the commitment to manage your financial standing, where do you begin? Start where creditors do -- by examining your credit score.

Your credit score is an indicator of your credit worthiness. In other words, it lets creditors know whether they should extend a loan to you -- if you're a responsible borrower or if you're a constant delinquent.

Your credit score is a vital piece of information, exerting a great influence over your life decisions. It can determine how nice of a house you buy, what school you (or your children) can attend, what kind of car you buy, and what interest rates you receive on credit purchases. In essence, having a higher credit score can not only save you thousands of dollars in interest fees, but it can also impact your quality of life.

A credit score, also known as a FICO (Fair Isaac & Co.) score, ranges from roughly 300 to 850 (with 850 being perfect credit). Everyone with a social security number has a financial history on public record, including payment history. The three major credit bureaus - Equifax, Experian, and Transunion - serve as compilers of people's credit histories, and make them available to lenders. Credit scoring is relatively simple: a score below 600 or so signals a problematic borrower, meaning you would not be eligible for all loans and most likely pay higher interest rates. Conversely, a score in the 800 range signals a good borrower, giving you the most options and best rates for loans.

The credit bureaus tend to group people with similar financial characteristics in order to assign a score. They take into account credit history, large purchases, and income. They then compare these statistics to other people with similar characteristics and assign a credit score between 300 and 850.

Your credit score is based on five major criteria:

• Payment History: ~35% of your credit score is based on your bill payment history.
• Amounts Owed: ~30% of your credit score is based on the amount of money you currently owe.
• Credit History Length: ~15% of your credit score is based on the amount of time you've been building credit.
• Recent Credit Activity: ~10% of your score is based on new credit activity.
• Types of Credit: ~10% of your score is based on the type of credit you have outstanding, such as a current car loan or home loan.

In addition to the five major criteria above, lenders also look at other factors that can sway their decision, including late and missed payments. These items are examined more closely than a simple "late or not late." Credit bureaus analyze exactly how late you were on your payments, how much you owed at the time, and how recently the delinquency occurred. Additionally, past bankruptcy, lawsuits, and items sent to collection all contribute to your credit worthiness. Factors such as these can make lenders weary of issuing a loan, even if the borrower has a good credit score. It should be noted, however, that as more time passes bad marks such as these count less and less.

Surprisingly, items you might expect to influence your credit -- such as your income, bank account balance, or employment -- do not factor into your credit score.

Go back to Credit Reports