Credit Score Explained

You may (or may not) be surprised to learn that almost every bill that you pay is tracked by three credit bureaus: Equifax, Experian, and Trans Union. There are five factors used to determine your credit score which are computed by the Fair Issac Corporation (FICO) and this translates to a FICO score. This is how your personal credit score is determined.

Credit scores range from 300 to 850, and the higher the better. A score between 760 and 850 is considered "perfect" and makes you a favored customer in the eyes of lenders.

Let's take a look at the five factors that determine your credit score:

About 35% is based on your timely payment of bills. This is the biggest part of your FICO score. Why? It shows how reliable you are about meeting your financial obligations.

Approximately 30% is based on the amount of debt you have outstanding. Lenders look at your debt-to-credit-limit ratio to determine how much debt you have and can handle. You can easily compute this number yourself by adding up all your outstanding balances and dividing them by your credit limit. If you have a high ratio it may mean a lower credit score. You can reduce your ratio by paying down debt.

See the article on improving credit scores.

15% of your FICO score is based on length of your credit history. In most cases, the longer your credit history, the better.

New applications for credit account for about 10% of your FICO score.

The type of credit you have accounts for the final 10% of your FICO score, such as mortgage, retail cards, major credit cards, and car loans, etc.

Everyone is entitled to one free copy of their credit report annually from each of the three credit bureaus. Beware of advertisements offering you a free credit report. Many of these are only free if you sign up for additional services that cost money.

You can contact the three credit agencies directly or go to www. annualcreditreport.com or call (877) 322-8228. What you will receive is lengthy credit report. What you will not get is the important number that is your credit score.

You can obtain your score from www.myfico.com for $15.95. This will give you the score from one of the credit bureaus, and that is really all you need.

I personally found that it took me a lot of time to obtain the free reports and that myfico.com provided more useful information much quicker.

It is important to address any errors you find in your credit history immediately, and it is not always easy to clear up errors. You also want to be vigilant to guard against identity theft.

There are several ways to improve your credit.

Why Your Credit Matters

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