What is a Credit Score and Why Is It Important?

A credit score is a mathematical formula taken from the information in your credit report (check out the February blog for additional information).  The formula used indicates how likely you are to continue to pay your bills based upon how you have paid your bills in the past.  A few of the factors that can affect your score (going up and down) are based upon the number of open accounts you have; how recently you have opened or closed an account; how many times you have paid late on an account.

Each of the three main credit reporting companies have their own scale.  If you wish to know your credit score, you will need to pay a fee to obtain your credit score.  Their score is different than the score by the most respected and widely used organization.  For additional information, go to www.consumerfinance.gov/newsroom/consumer-financial-protection-bureau-report-examines-differences-between-credit-scores-consumers-and-lenders-receive.

A FICO credit score is considered to be the standard in the industry.  Founded in 1956 as the Fair, Isaac and Company, they created a system to examine a person's credit history and create a number used by financial services companies.  To compose a credit score, payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and types of credit used (10%) are combined.  Your credit score is a number based upon a range of different categories:

Excellent Credit:  750+
Good Credit:  700-749
Fair Credit:  650-699
Poor Credit:  600-649
Bad Credit:  below 599

Having a low credit score and keep you from securing a place to live, getting a car loan, and even getting a job.  Therefore it is important to maintain a good payment history. 

There are ways to improve your score.  Paying on time, reducing the amount owed, and keeping the accounts open (closing an account will actually reduce your credit) will allow the number to raise over time.

Another reason for a low score can be someone without a credit history such as a recent college graduate.  Open a major credit card, charge a small amount each month, and pay it off.

To learn more about credit scores, go to the FICO site at
www.myfico.com/Downloads/Files/myFICO_UYFS_Booklet.pdf.