The Importance of Your Credit Score

Your credit score is a number, between 300 and 850, that is used by creditors to decide whether to give you credit and at what interest rate— the higher the number, the better your credit rating.

Why Credit Scores Are Important

Credit scores are used by lenders to predict if you’ll pay off your loans and whether you’ll pay on- time. Your credit score is also used by some credit card companies, phone companies, insurance companies, landlords and employers as a way to determine your “worthiness” for a credit card, cell phone account, car insurance or a job.

Because so many others know—and use—your score, you should check it to see how you rate. Your scores can also change from day to day. One common score lenders use is the FICO score. For a fee, you can get yours at www.myfico.com. Use your credit score as a general guide to better understand your financial health. It can help you know what steps to take to improve your credit options.

What Determines Your Score

Many factors in your credit report determine your score. No one piece of information determines your score.

Payment history

• Information from credit cards, store accounts, car loans, finance companies, mortgages, etc. about how timely you make payments.
• Accounts in collection or past due.
• Information in public records, such as bankruptcy, judgments, liens, wage attachments, or child support orders.

Amount of debt

• How much you owe on all your accounts.
• How much credit you have available    to use.

Credit account history

• How long ago you opened and used your accounts.
• How recently you applied for new credit.
• Recent good credit history following past payment problems.

Types of credit

• The different types credit accounts you have.
• The total number of accounts you have.

Getting Your Credit Score and Report

The credit score gives you a number score from 300 to 850. When you buy your score, you get an explanation of what the score means and the top reasons your score was not higher.

The credit report has specific information that credit bureaus (now called consumer reporting companies) collect from your creditors. You are allowed to view your credit report once a year for free from one reporting agency from online sites such as www.freecreditreport.com.

How to Raise Your Credit Score

• Inspect your credit report and correct any errors. One study found that 29% of credit reports studied had serious errors.
• Pay your bills on time. Paying late hurts your score more than anything, except not paying at all or bankruptcy.
• Apply for credit only when you need it.
• Lower the balances on your credit accounts.
• Don’t put all of your spending on a credit card. It can make you look deep in debt, even if you pay it off each month.

Excerpted from http://www.aarp.org/money/credit_debt/a2002-10-04-CreditDebtCreditScores.html