Understanding Your Credit Score

Many consumers and even businesses are confused about credit scoring, but this important number can help determine whether lenders will extend credit to you. It's important to understand not only what is your credit score, but what factors go into it.

Basically, information in your credit report or credit file is used to formulate your credit score. This number can range between 300 and 850, depending on the credit reporting agency.

Each credit reporting agency uses a different scoring model, so your credit score may vary from agency to agency. The most commonly used model is the FICO (Fair, Isaac Credit Organization) score. All scoring models are mostly influenced by the following: how you pay your debts and how much debt you owe. When formulating your score, each agency pays close attention to:

• Your payment history. Do you pay your credit accounts on time? Are there bankruptcies or other negative items on your record?
• How much you owe. What is the total owed on all of your account? What percent of your available credit are you using? Is your debt load manageable?
• The length of your credit history. For how many years have you demonstrated responsible credit management?
• Have you recently applied for or opened new credit accounts?

Most people have a credit score in the 600s and 700s. Scores above 700 are a sign of financial health and can earn you relatively low "prime" interest rates and favorable lending terms. People with scores about 760 are charged the lowest rates.

If your credit score is below 600, lenders will view you as "high risk". They could turn down your credit application. You may have to use a "sub prime" lender who will offer you less favorable payment terms. You will be charged much higher interest rates and will probably have to make a larger down payment.

If you are married, be aware that you and your spouse do not share a credit score. In fact, each spouse has a separate score that reflects his or her own past credit history.

The BBB warns consumers to not be fooled by people who claim to be able to raise your credit scores. Although fixing errors in your credit report can affect your score, the best way to raise your score is to pay your bills on time, try to control credit spending, and monitor your credit report carefully. You can get a free credit report once per year by visiting www.annualcreditreport.com. For more information, visit the Federal Trade Commission website at http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre24.htm.