How Your Credit Score Affects You

Your personal credit score has everything to do with who wants to lend you money. It affects whether or not you get a credit card, approved for a mortgage or even sign a lease. Some employers check credit scores before hiring or promoting you, and even insurance companies routinely base quotes on credit score. Obviously, your credit score dictates much of your financial success, so it's a good idea to become aware of this powerful number.

What is a credit score? It is a 3-digit rating number that helps lenders predict your credit risk factor. Will you pay on time? Pay slow? Default on your loan? Lenders hope to predict all this in advance and use credit scores as their crystal balls. Your score is computed from information contained in your credit reports, which are created by the top credit bureaus. Scores range from 300 – 850, with the average around 700. You do have the legal right to see your credit report annually at no cost, but not your credit score. You typically have to pay to see your credit score, which is considered proprietary information.

Financial lenders believe there is a direct correlation between your score and your chance of defaulting on your credit responsibilities. So the higher your credit score, the lower the risk. High scores get the best loan terms; low scores the worst. With a bad score, you will pay excess interest which can cost thousands of extra dollars over the term of a loan.

Your credit score is based on over 80 factors and is computed based on the contents of your credit report at a given point in time. That means credit scores are not fixed, but change with new information. That's good news because it means you can recover good credit standing over time.

• Factors Used to Determine Credit Scores:
• Your payment history - Assesses whether you pay on time
• Number of credit accounts you have - Looks at the mix of loans and credit accounts you have
• Amount of credit used in comparison to your total credit limits - Evaluates if you're overextended and using too much of your available credit
• Length of credit history - How long you've used credit
• Number of credit inquiries - How many companies have pulled your credit report in the last 2 years; too many is bad
• Bills sent to collections agencies - Checks for defaults
• Any legal judgments against you or bankruptcies - These will penalize your score

Knowing the reasons behind your particular score is as important as knowing the score. This knowledge lets you proactively manage your credit so you can get better loans at lower interest rates.