What's a Credit Score?

By George Stargell, Senior Editor   

Let's start with the basics: Your credit score is a three-digit number, based on a secret formula originally developed by Fair Isaac Corporation (creators of the FICO^® score, which is the lending industry's standard), that grades your financial history over the last seven to ten years.

Since the three major credit bureaus gather information about your finances from different sources, you have three different credit scores, one for each bureau.

Score ranges vary but generally fall somewhere between 305 and 849. The higher your score, the better your prospects are. Your score can change whenever there's new activity on your credit report, though.

Lenders use your credit score to help assess the risk that you'll stop paying off what you owe — and to determine your interest rate if your credit request is approved. All other things being equal, the higher your score, the lower your interest rate will be.

How important is my credit score?

• Landlords use it to try to predict whether you'll pay the rent month after month.
• Potential employers use it to measure your financial well-being, particularly if the position you want deals with sensitive information or large sums of money.
• Credit card and insurance companies use it to determine the rates you pay.

What factors go into my credit score?

• Credit history. The longer, the better, assuming you stay up-to-date on all your accounts.
• Payment history. On-time payments are good. Late payments aren't.
• Outstanding debt. If you already owe a lot elsewhere, a new lender may not want to add more to your debt pile.
• Existing accounts. There's a fine line between too many accounts and too few. Credit bureaus don't tell you where they draw that line, though.
• New accounts. Opening a cable TV account is okay; opening five new credit card accounts at once generally isn't.
• Inquiries. You can make as many credit report inquiries as you want. A lot of outside inquiries can be a sign of financial uncertainty, though.

Credit scores are an important part of your financial life. The sooner you embrace that fact, the better off you'll be.