What's a credit score and why should I care about it?

Your credit score is the result of a mathematical formula that's applied to all the information in your credit report (both positive and negative) and then compared to millions of other credit reports. The most common credit score is a FICO score, developed by the Fair Isaac Corporation. A variation of the basic FICO model is used by each of the three major credit reporting agencies: Equifax, Experian, and TransUnion.

Your FICO score is based on five categories, each of which accounts for a percentage of your total score:

• Your payment history: 35%
• An analysis of your debt: 30%
• The length of your credit history: 15%
• Recent inquiries/new credit activity: 10%
• Types of credit in use: 10%

The result is a three-digit number between 300 and 850 that estimates your level of credit risk. The higher the number, the lower the risk.

This number significantly affects your ability to get credit and the terms you're offered. Generally, lenders consider people with scores above 700 to be in good financial health, and worthy of the best interest rates and credit terms. Those with scores below 600 are considered to be financially risky, and may be turned down for credit or offered stricter terms (higher interest rates, lower credit limits, and/or requirements for collateral or a cosigner or both).

To keep your score high:

• Pay your bills on time
• Repair any damage (i.e., overdue payments) as quickly as possible
• Keep your balances on your credit cards low (especially in relation to your credit limits)
• Pay off your debt