What is a credit score?

There is not one simple way to define that all too mysterious number that seems to define our financial life. A credit score is made up of many things. Through the haze of confusion and misinformation I will provide a clear answer for the murky credit score. Buckle your seatbelts. Here we go!

Looking for the simple answer? Here are the straightforward highlights about a credit score:

What is a credit score?

• A credit score is based on a math formula that creates a three digit number that ranges from 300-850.
• Low scores mean that you are a risk to lend money or extend credit.
• High scores mean that you are responsible and are a good person to give credit or lend money.
• The scoring system gets its name, FICO, from the Fair Issac Corporation that created it.
• Each credit reporting agency uses a slightly different calculation, so scores can differ based on how they add it up.
• The score is calculated based on the following information that is contained on your credit report.
• • How you pay your bills. On time or late.
  • How much outstanding debt you owe.
  • How many credit application have you been filling out.
  • The types and number of credit and loan account you have open.
  • Past delinquencies, public records (bankruptcies, etc) and bad payment behavior.

What are the factors that impact my credit score?

• 35% of your score is based on your payment history.
• 30% of your score is based on how many accounts you have open and how much you owe.
• 15% of your score is based on the length of your credit history. Generally, longer credit histories are better..
• 10% of your score is based on recently opened accounts and how many credit applications you are filling out. Lots of new applications looks bad.
• 10% of your score is based on the types of credit accounts you have open.  Some types of credit accounts are viewed as riskier than others.  Credit card accounts are viewed as riskier than a mortgage loan, for example.

Look here if you want some more background information:

The credit score software treats everyone equally and does not use things such as race or religious beliefs. Your credit score gives lenders, credit card companies and service offerers a quick and simple idea of how well you handle money. Be aware that a credit score and credit report are not one in the same and that getting a credit report from a credit reporting agency (Equifax, Experian, TransUnion) does not always mean you will get a FICO credit score.

Each of the major credit reporting agencies have slightly different scoring models which leads to varying credit score calculations (click the link to find out why credit scores are different between credit agencies). If you pull scores from each of the three credit reporting agencies, you may likely get three different scores. This is important because each credit card or loan company you fill out an application for, could be using a different credit reporting agency and getting a different credit score.