An Introduction To Credit Scores

In simple words, credit scores help lenders know what risk they would be taking by loaning money to you and the likelihood of you repaying the loan. Generally, the higher your score, the more money you can borrow, and the lower the cost of borrowing.

 Credit score usually refers to your FICO score, a number based on a formula developed by the Fair Isaac Corporation. While evaluating your credit score, Fair Isaac would examine your credit accounts and payment history including the credit cards you own and any late or missed payments. FICO scores range from 300 to 850 and many different brands of credit scores exist. Though Fair Isaac calculates the scores for each of the three big credit-reporting agencies (Equifax, Experian and TransUnion,) FICO scores for each may differ as agency uses its own formula.

 Your credit score is determined by the following factors:

• Payment history (may even include library fines, medical bills or parking tickets
• Amounts owed to your creditors and how that compares with the total credit available to you.
• Length of credit history
• Number of accounts recently opened compared with total number of your accounts. Also includes number of recent inquiries on your report by lenders
• Types of credit used

 A credit score above 700 will usually get you the best rates on a loan or credit card. It is important to remember that credit scores do not consider your income, savings or down payment amount but making payments on time is one of the most important factors affecting your credit score. You should also consider not having too many credit cards and keeping a low balance, generally less than a third of your credit limit.

 Once a year, you can get a free credit report from each of the three major credit agencies that can be ordered from annualcreditreport.com, which is the only authorized online site under federal law.