Credit Score 101: Simple Answers to Basic Questions

A credit score is a number. In the widely used FICO scoring model, this number ranges from 300 to 850. Other scoring models may have different ranges. For example, the recently introduced Vantage Score has a range of 501 to 990. Regardless of the credit scoring model, the bottom line is: the higher your credit score, the better.

2) What does a credit score say about me?

A credit score measures your creditworthiness, i.e. how likely you are to pay your bills and pay them on time. Prospective creditors need to know how much of a risk a credit applicant will be. Credit scoring systems make it possible for lenders to decide whether to issue credit and at what rate.

3) How important is a good credit score?

If you have ever been turned down for a loan, then you have found out (in a painful way) how important a high credit score is. When you apply for a mortgage or a car loan, for store credit or even a job where you will be expected to handle a lot of money, your credit report is pulled and you credit score is reviewed. A good credit score will help you get what you want.

4) How is my credit score calculated?

A credit score is derived from the statistical analysis of information collected in the independent databases of each of the three major credit reporting agencies (aka "credit bureaus"). These agencies (Experian, Equifax, TransUnion) accumulate information about your credit accounts and payment history. A complex algorithm (mathematical formula) is then applied to all this information, and yields a single number by which the lending industry measures your creditworthiness. This is your credit score.

5) What parameters factor into my credit score?

According to the Fair Isaac Corp. (developers of the FICO credit scoring model), the following factors make up a credit score:

35%: Payment history (with emphasis on recent activity)

30%: Amount of debt vs total credit line (which is why you should never max out your credit)

15%: Length of credit history (the longer your history, the better)

10%: Types of credit (i.e. mix of credit, e.g. a combination of revolving and installment credit)

10%: Recent credit (i.e. whether you have been applying for credit recently)

6) What can I do to improve my credit score?

Achieving and maintaining a high credit score is not hard, but it does take time. Changes will not happen overnight. Here are some tips:

Check your credit report regularly, at least once a year, to make sure there are no errors in your credit file. If you are planning on applying for a big loan (auto loan, mortgage), check your credit report at least 3-6 months before you apply. This should give you time to correct any errors you may find.

Never, ever miss a payment. Pay your bills on time.

Keep your credit balances low. The ideal is for your balance on any credit card to be 30% (or lower) of the line of credit.

Apply for credit sparingly. Don't be tempted by all the "pre-approved" credit offers that inundate your mailbox. Prospective creditors tend to interpret too many credit applications within a short period of time as a sign of desperation and an indication of bad credit risk.

Use credit sparingly. Through responsible financial behavior, build yourself a good credit score for when you need to use it to buy a car or a home. Don't make a habit of using credit cards for groceries, going to the movies, or eating out.