Credit reports are detailed dossiers of your credit accounts and financial transactions, compiled by three reporting agencies called Experian, Equifax and TransUnion. Many lenders review your reports, but some prefer to use your credit score, which compacts all your report data into a simple number. Your score changes regularly, based on the information in your reports, so it is always up to date, according to the Board of Governors of the Federal Reserve System.
Definition
A credit score is a three-digit number calculated by original scoring company Fair Issac Corp. or a credit bureau. It summarizes your creditworthiness based on your current and past financial activity. Scores run between 300 and 850, according to Leslie McFadden of the Bankrate website, and a higher score means you are a more trustworthy borrower. Low scores mean you are at higher risk of defaulting on bills or filing for bankruptcy.
Factors
Credit score formulas are based on various factors related to your credit use, with some actions weighed for heavily than others. For example, the timeliness of your payments and signs of financial mismanagement, like charged-off accounts or repossessions, are 35 percent of your score, according to the MyFICO scoring site, while owed balances account for 30 percent. Fifteen percent of the total number is based on how long you have had loans and credit cards, while your newest accounts and your mix of revolving and installment credit makes up the remaining 10 percent.
Range
Lenders grant new accounts and determine interest rates, fees and other terms based on a range of credit scores that marks you as a highly desirable or average customer or high-risk credit user. The best scores fall between 760 and 800, while anything below 620 classifies you as "subprime" and raises your application rejection risk. Creditors may insist on charging higher-than-average interest if they do agree to work with you.
Access
The Fair and Accurate Credit Transactions Act, an amendment to the Fair Credit Reporting Act, entitles you to see your credit score but allows FICO and the credit bureaus to charge you for it. Experian, Equifax and TransUnion must give you free credit reports yearly through AnnualCreditReport.com, but the law lets them impose a "reasonable" fee for your score. The usual charge is around $8, according to the Federal Trade Commission. Two websites, CreditKarma and Quizzle, which is owned by Quicken, give free credit scores with no purchase requirements, according to financial adviser Clark Howard.
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