What Really Is a Credit Score?

What exactly is a credit score? It's actually pretty simple, but because so much goes into it, and because so much depends on it, credit scores can be overwhelming. A credit score can be used to determine whether or not you get the new car you've been wanting, get a good interest rate, get the job you need, get utilities turned on deposit-free or get to live in a certain house.

Your score is a numerical representation of your lending risk. That is, how risky it would be for a lender to loan you money. The higher (the better) your credit score, the lower the predicted risk, or the more likely you are to get that loan (and a good rate), or to get that job, house or car.

Bottom line: your score measures how likely you are to pay your bills (and on time).

The dominant scoring system is the FICO Score, and you have three credit scores, one from each of the three major credit reporting agencies (Equifax, Transunion and Experian). Because each agency considers the data it has differently, your scores may vary slightly between agencies. The score is a three-digit number, ranging from 300 to 900 (most people are 600 to 800), and the higher your score, the better.

Five factors are taken into account when determining your credit score:

1. Payment history - How you've paid past accounts (whether or not you've been late, delinquent, have any accounts that have gone to collections or have had any bankruptcies)
2. Amounts owed - How much you currently owe on your accounts and how much credit you currently have available
3. Length of credit history - How long you have been establishing credit
4. Type of credit - What's your mix of credit cards, mortgages, auto loans, etc.
5. New credit - How many recent credit inquires and recently opened accounts

It's important to remember that your credit score changes over time, so that gives you time to repair mistakes or build up from a lack of credit. How do you get a good score or fix a bad score? It's pretty basic, but it takes time: pay your bills on time, pay down debt and don't take out more credit than really necessary.

It's smart to check your credit frequently, not just so you know where you stand when it comes to lending, but also to secure your credit - to be sure that your identity hasn't been stolen (you'll be able to see recent activity under your name and be able to tell if something isn't right.

Research credit information online is the first step to securing your credit. Take an extra step to securing your credit score by analyzing your credit history using a variety of credit monitoring tools from Equifax.

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