About This QuizYour credit score plays a large part in whether you can buy a house or car. In certain circumstances, it even affects whether you can get a job. But where does the number come from?
A credit score is:
a three-digit number summarizing the state of your credit
The major credit reporting bureaus might report slightly different scores, but all three use a three-digit number to summarize the state of your credit.
an alphabetical score grading your creditworthiness
a numerical score reporting how much money you owe
A credit score helps a lender determine:
how much money you owe
how much money you make
whether you're a good financial risk
Your debts definitely show up on a credit report, but your credit score is a little different. Its job is to give lenders a yes-or-no answer in response to the question, "Will this person pay my money back?"
The main type of credit score is called FICO because:
It stands for "Finances, Income, Credit, Outgo."
It originated with Fair Isaac and Company.
Fair Isaac and Company worked with the three main credit bureaus to come up with its three-digit score in the 1980s. Each bureau uses a slightly different version of the FICO score with its own name.
It's an acronym for "fiduciary company," or a company entrusted to protect another's assets.
Credit scores range from:
zero to 100
300 to 850
Credit scores range from 300 to 850 -- the higher the better. As of March 2008, the average credit score in the United States is 692.
100 to 1,000
The biggest factor in your credit score is:
whether you pay your bills on time
Your total debt and the length of your credit history both play a role in your overall credit score. But the biggest factor is whether you pay your bills on time. Pay bills late, and your score will drop.
how much debt you have
how long you've had credit
You can improve your credit score by:
closing any unused lines of credit
reviewing your report regularly and correcting any errors
Credit reports aren't foolproof. If you contact credit reporting agencies and have bad information removed, you may improve your score. Avoiding credit entirely means you'll have no credit history, which will make it harder to get a loan.
refusing to use credit for any purchase
Your credit score affects:
whether you can get a loan
your interest rate
both A and B
In addition to using your credit score to help decide whether it's a good idea to give you money, lenders use the score to determine your rate. In general, the better the score, the lower the rate -- and the lower your payments.
Insurers have used credit scores to determine insurance rates because:
People who have good driving records also have good credit.
Research shows a correlation between lower credit scores and increased insurance claims.
Some insurance companies use credit scores to help decide if you are a good risk. They don't necessarily use your entire score, though. Bureaus may provide a modified insurance score that uses only part of your credit history. Some states have passed laws banning the use of credit scores for insurance.
People who have good finances are in better health.
To keep your credit score high, you should keep old credit accounts active because:
You may need the money someday.
The higher your total credit limit, the higher your score.
The length of your credit history affects your score.
It may seem like a good idea to remove the temptation of an unused credit line, but if that line is one of your older forms of credit, your score may go down. Also, your debt-to-credit ratio is important -- having an unused line of credit makes your ratio go down, improving your score.
Inquiries from lenders to the credit bureau will:
raise your score
lower your score
In general, when someone pulls your credit score, your total score may drop. This is particularly true if there are lots of inquires in a short amount of time. Lots of inquiries may mean that you're desperate for money.
not affect your score