Understanding Your Credit Score (and Why It Matters)
What’s your credit score? If you don’t know, it’s a good idea to find out because this simple number can have an important impact on your financial life.
What Is It?
Your credit score is a rating of your creditworthiness, or basically how risky it is to lend you money. The FICO score—the one most often used—ranges from 300 to 850, and the higher the number the better. Credit reports with your score are created by three credit bureaus—Equifax, Experian and TransUnion--based on several factors:
- Your payment history, including late payments or delinquencies, accounts for 35% of the score.
- How much you owe accounts for 30%.
- How long you’ve had accounts for 15%.
- The type of credit used accounts for 10%
- The amount of new credit you have accounts for 10%.
What’s in a Credit Report?
Lenders also use credit reports in their lending decisions. You have the right to request one free credit report every 12 months from each of the three credit bureaus. These reports may not include your credit score, but many financial institutions will provide you with your credit score for free, so it should not be necessary to pay for your credit score.
It’s a good idea to check your credit reports regularly to be sure they are accurate and to alert the credit bureaus if you find an error or signs of possible identity theft. The reports usually cover:
- Information about you, including your name, address, Social Security number, telephone number, employer, past address and past employer, and information about your spouse, if applicable.
- Account details. The report will list all your accounts, along with information on the name of each lender; the account number and type of account; when the account was opened; the highest balance outstanding that you’ve had; the current balance; the terms of the account; and your payment history. For example, it will show whether you’ve been late, and if so, how late. The report may cover accounts that you don’t use anymore, so be sure to contact the companies involved and ask them to close the account.
- Credit history problems. These might include past bankruptcies, for example.
- Who has requested your credit information during the past 24 months? This usually happens either when you apply for credit or if a credit card company wants to offer you an account.
Why It Matters
Lenders—whether they’re giving you a mortgage, providing financing on a car or offering you a credit card—want to know how well you’ve used credit in the past to decide whether they should lend you money now. They do this by checking your credit reports and score. If you have a low score or problems in your credit report, you may have trouble finding a lender who will lend to you or you may have to pay a high interest rate to get credit.