All You Need To Know About Credit Scores

Credit score is a number that helps lenders and others predict how likely you are to make your credit payments on time. Each score is based on the information found your credit report.

When lenders talk about "your score," they usually mean the FICO® score developed by Fair Isaac Corporation. It is today's most commonly used scoring system. FICO scores range from 300-850, and most people score in the 600s and 700s (higher FICO scores are better). Lenders buy your FICO score from three national credit reporting agencies (also called credit bureaus): Equifax, Experian and TransUnion.

In the eyes of most lenders, FICO credit scores above 700 are very good and a sign of good financial health. FICO scores below 600 indicate high risk to lenders and could lead lenders to charge you much higher rates or turn down your credit application.

Good credit scores will help you:
- Lower your interest rates.
- Speed up credit approvals.
- Reduce deposits required by utilities.
- Get approved for apartments.
- Get better credit card, auto loan and mortgage offers.

There are many types of credit scores. They are developed by independent companies, credit reporting agencies, and even some lenders. As a rule, the higher the score, the better.

• Each credit reporting agency calculates your score and each score may be different because the credit history each agency has about you may be different. Lenders may make a credit card or auto loan decision based on a single agency's score, although others such as mortgage lenders often will look at all three scores.


• Your credit score changes when your information changes at that credit reporting agency. This is good news! It means you can improve a poor score over time by improving how you handle credit.


• Many insurance companies use something similar when setting your insurance rates, called a "credit-based insurance score." You may be able to improve your insurance score by improving how you handle credit, which in turn may lower your premium payments on auto or homeowners insurance.


• Some credit scores offered to consumers are just estimates and are different from the credit risk scores lenders actually use, although they may appear similar. Consumer reporting agencies and other companies sometimes use an estimated score to illustrate a consumer's general level of credit risk. How might you tell whether a score is estimated? Ask the company if the score is used by most lenders. If it isn't, it is likely to be an estimated score.

As a rule, credit scores analyze the credit-related information on your credit report. How they do this varies. Since FICO scores are frequently used, here is how these scores assess what is on your credit report.

1. Your payment history - about 35% of a FICO score
Have you paid your credit accounts on time? Late payments, bankruptcies, and other negative items can hurt your credit score. But a solid record of on-time payments helps your score.

2. How much you owe - about 30% of a FICO score
FICO scores look at the amounts you owe on all your accounts, the number of accounts with balances, and how much of your available credit you are using. The more you owe compared to your credit limit, the lower your score will be.

3. Length of your credit history - about 15% of a FICO score
A longer credit history will increase your score. However, you can get a high score with a short credit history if the rest of your credit report shows responsible credit management.

4. New credit - about 10% of a FICO score
If you have recently applied for or opened new credit accounts, your credit score will weigh this fact against the rest of your credit history. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur. If you need a loan, do your rate shopping within a focused period of time, such as 30 days, to avoid lowering your FICO score.

5. Other factors - about 10% of a FICO score
Several minor factors also can influence your score. For example, having a mix of credit types on your credit report - credit cards, installment loans such as a mortgage or auto loan, and personal lines of credit - is normal for people with longer credit histories and can add slightly to their scores.

Your credit scores change when new information is reported by your creditors. So your scores will improve over time when you manage your credit responsibly.
Here are some general ways to improve your credit scores:

• Pay your bills on time. Delinquent payments and collections can really hurt your score.


• Keep balances low on credit cards. High debt levels can hurt your score.


• Pay off debt rather than moving it between credit cards. The most effective way to improve your score in this area is to pay down your revolving credit.


• Apply for and open new credit accounts only when you need them.


• Check your credit report regularly for accuracy and contact the creditor and credit reporting agency to correct any errors.


• If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your score.