How a Credit Score Is Created

Every consumer in the United States that uses credit will get a credit score sooner or later, which will affect their ability to get terms on more credit. This number is constantly changing and takes into account a number of factors that reveal the individual's personal habits, dealing with how they handle money. A credit report begins when credit is issued to an applicant, but a credit score is not given right away.

Time Frame

A credit score will not be generated for someone until there is a certain amount of credit information available. Each of the three major credit bureau--EquiFax, Experian, and TransUnion--have their own credit scoring system and use a different numbering system.

MyFICO says that in order for a credit score to be calculated there are two things that must have taken place. The first is that you must have one credit account that has been open for at least six months, and secondly, that at least one account will have been updated within the past six months.

Significance

The reason for this time frame is so that the credit lender can know that the credit score is based on a sufficient amount of information, as well as information that is recent. Once this is in place, then the lender knows that a rather good picture of your current financial practices is in front of them.

Features

According to Experian, there are three different types of information that goes into your credit score. This includes information about your various accounts, such as credit cards, loans, mortgages and student loans, inquiries from lenders when you apply for credit, and from public records including bankruptcies or tax liens.

Effects

The credit score is constantly changing. It is not a static number. There are five things that affect your credit score and each one of them affects it with a different percentage. How well you pay, for instance, affects your FICO (Fair Isaac Company) score by 35 percent. This means that things like late payments and bankruptcies will negatively affect your credit scores more than anything else. Other factors that go into your credit score include the amount of debt you have (30 percent), how long you have had credit (15 percent), new credit (10 percent), and the types of credit; the more types (mortgage, car loan, credit cards) the better, according to the Consumer Federation of America.

Warning

Credit reports will often contain errors on them. If found, they should be corrected by contacting the credit bureau and following the steps given on their Webpage. Having a low credit score for whatever reason will mean you do not get the best interest rate, longevity of payments, or the amount you want. Experian advises constantly checking your credit report in order to get better deals on things like insurance, cellphone contracts, and renting an apartment. Even a potential employer may take a look and it is possible to not get a job because of something they see on your credit report.