Your Credit Score: Three Little Digits That Mean a Lot

Online, on television, in magazines—advertisements telling you to check and improve your credit score are everywhere. With good reason, since that three-digit number can determine your ability to get a loan for a home or car, as well as influence your interest rates on those loans. In addition, potential employers, insurance companies, cell phone carriers and landlords may use your credit score as a gauge of your trustworthiness.

There are many different credit scoring organizations, but most lenders rely on your FICO (Fair Isaac Corporation) score, which ranges from 300-850. In the early 1980s, t­he three major credit bureaus (Experian, Equifax and TransUnion) worked with Fair Isaac to create the scoring method.

Calculation of your credit score is based upon a complex formula that takes into account many factors:

• Your payment history (approximately 35%)
• Your outstanding debt (approximately 30%)
• The length of time of established credit (approximately 15%)
• The number of new credit lines opened (approximately 10%)
• The types of credit you currently have (approximately 10%)

Child support and rental obligations are not used in the calculation. Even closed accounts appear on your credit report for an indefinite amount of time and may be factored into your score.

Credit scores vary greatly among people and over time. Know where you stand:

• 723 is the average FICO score of Americans
• Borrowers with a score below 600 are considered to be high-risk
• Credit scores above 750 are considered to be excellent

The Fair Credit Reporting Act entitles you to a free annual copy of your credit report from each of the three main reporting agencies. To help protect yourself from the woes of identity theft, it is recommended that you request a report from one of the agencies every four months. Correct any errors you find as quickly as possible. Each of the agencies can also provide you with your current credit score for a modest fee, but you should be aware that this might not be identical to the FICO score used by creditors. The agencies also offer credit monitoring services for a monthly fee.

Get your free annual credit report:https://www.annualcreditreport.com/cra/index.jsp

Discover how to dispute credit report errors: http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre21.pdf