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Understanding Your Credit Score
- The first step to financial improvement



What is a credit score?

The credit scoring system was created in the 1980’s as a way for lenders to quickly assess
financial risk.  Credit scoring is now used by
lenders, insurance companies, landlords,
employers, and utility companies to evaluate credit behavior.



During major events and purchases in your life, creditors will utilize specific information found on your credit report along with your credit score to determine your credit worthiness.  How much or how little credit you are granted is determined by your credit score.



What is a good credit score?

A good score can vary depending on which credit scoring model is used.  The FICO scoring model, which is used by the major credit bureaus, has a score range of 350 to 900, with 900 being the highest possible score.  The average consumer’s credit score is around 700 to 750.



In most cases, creditors consider you less of a risk if you have a higher  score.  With a better score, the interest rates offered by creditors can be significantly lower.



How is my score determined?


The basic credit scoring formula takes into account several factors from your credit report.



While companies that develop credit scoring systems do not disclose the exact formula for rating a score, they do show what factors have a major impact on the score.

• Payment History—Payment history typically is a
  significant factor.  Your score will be affected negatively, if your credit report indicated you have paid bills late or have been referred to collections.



• Outstanding Debt—Many credit scoring models evaluate the amount of debt you have compared to your credit limits.  Balances above 50% of your credit limits will harm your credit.  It is best to keep balances under 30% of your credit limit.



• Credit Account History—Establishing a consistent credit history with creditors indicates less risk.  Do not opt to close accounts, if you are considering taking out new loans.



• Types of Credit—A healthy credit profile has a
  balanced mix of credit accounts and loans.
  
  
• New Credit—The credit score also takes into account how many accounts have been opened recently, and how many times recent inquiries have been made.



• Length of Credit History—Generally, the longer you have had accounts open, the better they appear on your credit score.  Also, there should not be long spans of time between account activity.

What else determines my score?

The Equal Credit Opportunity Act states that a credit scoring system may not use certain characteristics—like race, sex, marital status, national origin, or religion as factors.  However, creditors are allowed to use age in properly designed scoring systems.  Any scoring system that includes age must give equal treatment to elderly applicants.



If you feel that you have been discriminated against, you should file a complaint with the Federal Trade Commission.



How can I improve my credit score?

These simple steps can help improve your credit report and score:

• Know what is in your credit report and be sure to check it periodically


• Correct inaccurate information in your credit report


• Pay bills consistently on time


• Keep balances on credit card accounts low


• Pay off debt when you are able to do so


• Do not open or apply for several new
  accounts at once

Remember, there is no easy way to improve your credit score. It takes time and effort, but it can be done.


Article Updated: 11/16/2004 2:32:09 PM