Your Credit Score: What Does it Mean to You?

Your credit score represents how well you have done borrowing money and repaying that debt in the past. In short, it’s what lenders use to determine the amount of risk they will assume by lending to you.

What affects your score?
Scores are based on a mathematical formula that takes into account different areas of your credit history. The most commonly used formula was developed by Fair Isaac Corporation (FICO) and is based on five factors: payment history (35%), the length of your credit history (15%), outstanding debt (30%), new debt (10%) and the mix of credit you have (10%).*

FICO scores range from 300 to 850. The higher the number, the better—although the scale has shifted on what is considered “good” due to current economic conditions. Whereas a score of 700 may have qualified you for a lower rate two years ago, you could need a 740 or better to qualify for that same rate today.

What does your score affect?
Your credit score affects lots of things: the amount of a loan or credit extended to you, the interest rate you receive, how much you’ll pay for insurance or as a down payment on utilities, even whether or not you get that new apartment or job you’ve been after.

Generally the higher your score, the lower your rates. That translates to hundreds if not thousands of dollars in savings over time.

How can you improve your score?
First find out your current score by getting a copy of your credit report and checking it carefully for errors. Beyond that, the most important steps you can take are:

• Paying your bills on time. Late payments and delinquent accounts put the biggest strikes against you.

• Keeping your balances low. You want to owe on only a small portion—ideally 20% or less—of the total credit available to you.

• Maintaining your accounts. Keep your balances low, use a few different cards and don’t close older accounts. Lenders like to see that you have a solid track record as a responsible consumer.

• Applying for credit only when you need to. Prospective lenders review your credit report every time you apply for a loan or new credit card. This can lower your score, especially if a variety of companies look at it over a number of weeks.

Keep in mind that your credit score is always changing, so it’s a good idea to check it regularly. Legally you are entitled to a free credit report every 12 months. Request yours at www.annualcreditreport.com.

* Percentages are approximate.