Understanding Your Credit Score

Throughout TakingCredit.com, we refer to “credit scores.” When obtaining financial products and services, it’s important to know what a credit score is. This article details credit scores in the United States (since procedures are slightly different around the world).

What Is A Credit Score?

At TakingCredit.com, we refer primarily to credit scores for individuals. A credit score is a number that lenders will use to decide if they choose to provide a loan or line of credit to an individual.

As National Public Radio’s “Planet Money” notes, a credit rating can be used to determine corporate lines of credit. However, for our purposes, we’ll focus on credit scores for individuals.

How Is My Credit Score Determined?

You can learn more details about Credit Scores through the Wikipedia article about them. A person’s credit score may be affected by their ability to pay loans, interest, how much credit they’ve used, their saving and spending patterns, and their debt.

The exact formula behind credit scores is secret. However, organizing bodies have released some basic information. Approximately 30% is related to your current credit use with respect to your credit limits.  15% reflects your length of credit history. 10% is types of credit you use. Another 10% is the credit you’ve recently obtained. Punctuality of payments makes up the largest portion, 35%. Other miscellaneous factors, like money owed in a court judgment or lien or, in some cases, number of recent credit checks may also affect your credit score.

Who Decides My Credit Score?

Credit scores are compiled by credit reporting agencies, which organize and distribute data about all the things that determine your credit score. The top three credit reporting agencies are Equifax, Transunion, and Experian.

These companies all base their work on something called a FICO score, which is a model for determining an individual’s credit risk (as referenced in the previous section). Though each company has their own “credit score,” all three work from the same FICO model.

What’s A Good or Bad Credit Score?

Your Credit Score is closely tied to FICO, but each credit reporting agency uses their own model to determine your credit score. Sometimes, credit scores can vary between agencies by fifty to one hundred points. However, there are a few general trends.

First, a higher score is better. Credit scores are meant to represent the reliability of an individual, so the higher the number, the lower the risk. In short, a higher credit score is a “better” one.

FICO scores range from 300 to 900. Speaking generally, a credit score below 500 will severely limit your choice of financial products, while a score at or above 850 should allow you the maximum number of options.

Can My Credit Score Change?

Your credit score is a dynamic measurement of your history with credit. Credit scores are intended to measure your credit rating accurately and are updated accordingly.

After The Basics

Now that you know the basics about credit scores, you can learn details about improving, changing, and using your credit score to your advantage. Both good and bad credit scores can change, and knowing exactly what a credit score is can be a good first step in improving yours.

You can read more here about FICO Scores. This article is part of TakingCredit.com’s credit card glossary. You can learn more about credit through our archive of credit card tips and our credit card blog. Photo by Playing With Brushes.

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