What is a credit score?

A credit score is a number that represents your calculated measure of credit risk. The score is an objective summary of your credit history that represents your credit worthiness.  Your credit score is the result of a complex mathematical formula that takes into account numerous factors in your credit history.   A score is a number that tells the Lender how likely an individual is to repay a loan, or to make credit payments on time.

A lender may also use your credit score to calculate the rate you get for a loan; the lower your consumer credit score, the higher the interest rate you'll be charged. So over time, a good credit score can save you lots of money. Lenders look at your credit score report as a prediction of how likely you are to make your payments and make them on time.

Factors affecting your credit score

•    Payment history (about 35% of your score): whether you pay your bills on time, have ever been contacted by a collection agency, or whether or not you've declared bankruptcy.   How late and how often you are late are also considered.
•    The amount owed (about 30% of your score): the more money you owe, the lower your score.  Owing a great deal of money on many accounts can indicate a person is overextended.
•    The length of your credit history (about 15% of your score): the longer you've been establishing credit, the higher your credit score.
•    New Credit (about 10% of your score):  opening several credit accounts in a short period of time may represent a great risk.  Factors that weigh the score are the number of recent requests for credit, the number of new accounts, how long it has been since you opened an account, and the length of time since a lender made a credit inquiry.
•    Types of credit in use (about 10% of your score): this score considers your mix of credit.  You don’t need to have one of each type of credit, it is not a good idea to open credit accounts you don’t intend to use.  The score takes into account what kind of credit accounts you have and how many of each.

Credit Score Ranges

Most credit scores range from 300 to 900, with the majority of people in the 600 to 800 range. To get the most favorable interest rates, you'll need a score of 720 or higher. In terms of interest rates, on average, a person with a credit score of 520 will get interest rates on loans that are three to four percentage points higher than rates given to a person with a credit score of 720.

Factors that can damage your credit report include late payments, an absence of credit references, and unfavorable credit card use.

Credit Reports and Credit Scores – What’s the Difference?

Although they’re sometimes used interchangeably, credit reports and credit scores are two distinctly different parts of your credit history.

A credit report is a complete review of your financial past, including payment history, total debt, and more. A credit score is a number indicating your financial risk. In short, it’s a score measuring how likely you are to repay debts, such as loans or lines of credit.

Credit reports are prepared by the three national credit bureaus (also called credit reporting agencies)—Equifax, Experian and TransUnion. A single bureau credit report provides the information maintained by one of the three credit bureaus, and a 3-in-1 credit report, the most complete type of credit report, provides a compilation of the financial information maintained by all three credit bureaus.

Credit reports include the following consumer information:

•    Payment history
•    Length of credit history
•    Recent credit activity
•    Types of credit used
•    Personal information
•    Outstanding debt
•    Current and previous employers
•    Bankruptcies

Most of the information on your credit report comes directly from the institutions with which you’ve done business. By law, credit grantors and lending institutions are permitted to review your credit report to determine whether or not they will grant you credit, and if so, the interest rate they will charge. Therefore, the information on your credit report can make a significant difference in your financial future.