Credit Score - What it is and why it matters.

A credit score is a value, based on statistical analysis of your credit history, that has been shown to accurately predict if you will pay your debts. It is used by lenders, and others, to determine whether to extend credit to you. Even landlords and employers pull credit reports to decide if they should enter in a relationship with you.

Credit scores generally range from 300 on the low end to 850 for someone who is extremely creditworthy. If you score is high (720 or above) you receive lower interest rates and more favorable terms on your loans.

Three major credit bureaus compile information on your credit history and produce reports that assign a corresponding credit score. TransUnion, Experian and Equifax have proprietary formulas they use to arrive at a credit score. Lenders generally take the median of all three when considering credit.

How is your credit score calculated?

Your credit score is based on your credit in five main categories:

Payment history, especially most recent activity: This is the most heavily weighted criteria when assigning a credit score. If you have been late paying bills, it will negatively affect your credit.
Amounts Owed: How many credit accounts do you have and how much credit is still available on those accounts? Statistics show those with more credit accounts tend to use them, making them less attractive as far as credit scoring. The most attractive customer, reflected in a higher credit score, is one who uses credit sparingly and carries low balances.
Length of credit history: the longer you’ve responsibly used credit, the higher your score.
New credit inquiries: Multiple inquiries for credit in a short time period can signal credit problems, resulting in a lower credit score. It often means you are falling behind and need another source of funds. However, multiple inquiries made because you are shopping for a mortgage or auto loan are not a problem unless your credit is already marred.
Types of credit: Statistically, customers with a mix of credit accounts (mortgage, auto, credit card, etc.) are better paying customers.

What’s in my credit report?

If you haven’t ever reviewed your credit report, you should request a copy before applying for a loan. One free copy is available per year from each credit bureau, by law.

Identifiying information: Your credit report contains basic information about you: name, address, social security number, birth date and employment. This information is not part of your credit score.
Trade lines: all open credit accounts, with details such as account opening date, balance on the account, and payment history.
Inquiries: Whenever your credit report is accessed, that is considered an inquiry. Most often, it is accessed when you are being considered for new credit.
Public information: This section shows anything from the state and county courts that impact your credit, such as bankruptcy, foreclosure, accounts in collection, tax liens, judgments, suits and wage garnishments.

The 2003 Fair and Accurate Credit Transaction Act guarantees one free credit report each year from each of the credit bureaus. To request a copy, visit www.annualcreditreport.com or call 877.322.8228.

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