What are Credit Scores?

Your credit score is yet another number that becomes a part of your life. It is unlike your Social Security number because your credit score can change. A credit score is somewhat similar to what your grade point average was to you in school. Just as your GPA reflected how well you were doing in school, your credit score reflects how well you are doing with the money you borrow.

Credit Scores

Whenever you take out a loan, charge items on your credit card or pay rent or a mortgage, your creditors report your activity to the three major credit-reporting agencies, which are Experian, Equifax and TransUnion. If you pay your bills on time every month, your credit score will likely be high. If you are consistently late or if you stop paying completely and have debt collectors after you, your credit score will be low.

Five Factors

The reason you have a credit score is to give lenders a way to determine whether you'd be a good credit risk. Different credit scoring models exist, but the one that dominates all the rest is the Fair Isaac Corporation, or FICO, credit score. FICO scores range from 300 to 850, and the higher your score, the better. Five factors determine your credit score, and each factor is weighted differently. Payment history has the biggest impact on your credit score, accounting for 35 percent. How much you owe accounts for 30 percent of your score. Lenders prefer that you keep your balances low on revolving credit. Length of credit history comprises 15 percent of your credit score; the longer you have a credit history, the better. The types of credit you have account for 10 percent of your score, and new credit, which includes recently opened accounts and credit inquiries, also makes up 10 percent of your score.

Credit Report

You can get an idea whether your credit score is high or low by getting a free copy of your credit report. Do this by going to AnnualCreditReport.com (see Resources). Everyone is entitled to a free credit report from each of the three credit-reporting agencies every 12 months. Because each report can be different, stagger your requests. For example, get your Experian report, then in four months get your Equifax report, and in another four months, order your TransUnion. Start the cycle over the following year to keep track. You won't get to see your actual score, though, unless you pay extra for that, which is typically around $15.

Good Score or Bad

How the mathematical algorithms arrive at your credit score vary, but as a general rule, a FICO score above 750 is excellent and should get you the best interest rates on loans. Scores around 700 are good; a score around 650 is fair. If your score is below 600, lenders consider that a poor score, and you might not be able to get a loan, or if you can, you probably will pay a high interest rate.