The Meaning of Credit Report Scores

Your credit score comprises a number of factors which summarize your credit activities, including how much money you owe and how timely you are with your payments. A credit score, also known as a FICO (Fair Isaac Corporation) score, consists of a number ranging from 300 to 850. The higher the number is, the better your credit rating. Before you can work to improve your FICO score, you should know the meaning of credit report scores.

Credit Scores

Your credit report scores are calculated using five different categories of credit data found in your report: payment history, amounts owing, length of credit history, recent credit and types of credit used. More than one-third of your credit score is a reflection of your payment history -- number of accounts paid as agreed, past due accounts, collection items and the total amount of any delinquencies. Nearly one-third of your score is determined by your credit-utilization rate, or how much you owe compared to your total available credit.

Score Ranges

Another meaning behind credit report scores focuses on how likely you are to repay your debts and the amount of risk you present to lenders. Higher credit scores will translate to lower interest rates and easier approvals for you on loans and credit cards, since you present less risk. Whereas, lower credit scores mean higher interest rates and more restrictions on loans and other credit or being turned down altogether by lenders. A score of 720 or higher is generally considered to be excellent and should get you the most favorable mortgage interest rate. Only 13 percent of the population has credit report scores over 800, with the majority of the population falling somewhere between 750 and 799.

Benefits

Higher credit report scores can be beneficial for reducing premiums for homeowners, car and private mortgage insurance. Car insurance providers use credit scores to assess your accident probability ratio, as consumers with higher credit scores typically tend to file fewer insurance claims. In contrast, lower credit report scores can mean higher insurance premiums. It can also mean getting approved for a smaller amount with a mortgage loan and bigger security deposits required to set up utility or phone service accounts.

Free Reports

Since your credit report contains a decade's worth of information about your credit activities, there is a chance it could have errors. Correcting any errors in your report is an easy way to improve your credit report scores. At AnnualCreditReport.com you can get a free copy of your credit report from each of the three main credit reporting bureaus -- TransUnion, Experian and Equifax -- once a year. Common reporting errors include out-of-date addresses, accounts listed that you no longer have and sometimes, outright false information.