What Is Your Credit Score and How You Can Make It Better

There are quite a few myths and rumors about what your credit score is and how you can make it better. Knowing the facts from the fiction is important if you want to have an easier time getting your loan approved or even getting a credit card.

What Is a Credit Score?
A credit score is part of a system creditors (like banks and mortgage companies) use to help determine whether to give you credit. It also may be used to help decide the terms you are offered or the rate you will pay for the loan. The most widely used credit scoring system creates a FICO score, which can be as low as 300 and and as high as 850. Generally, a score in the 700s is a good score, and one below 600 is not so good.

Information about you and your credit experiences, like your bill paying history, the number and type of accounts you have, whether you pay your bills by the date they’re due, collection actions, outstanding debt, and the age of your accounts, is collected from your credit report. Creditors compare this information to the loan repayment history of consumers with similar profiles. For example, a credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points — a credit score — helps predict how creditworthy you are — how likely it is that you will repay a loan and make the payments when they’re due.

Why Should I Care About My Credit Score?
If your score is high, that means you are a lower than average credit risk and you would likely get a loan with a higher loan with a lower interest rate. If you have a lower score, you may still get a loan, but for a smaller amount at a higher interest rate. If your score is low enough, you may not be able to get a loan from a bank, or even a credit card. The better your credit, the higher your credit score and the lower the risk to a bank or other creditor.

How Can I Get a High Credit Score?
Your credit score is a reflection of your financial life. If you have been responsible when it comes to paying bills on time, and don't miss loan payments on expensive items like cars and homes, you are doing many of the right things for a high score. If your credit report indicates that you have paid bills late, had an account referred to collections, or declared bankruptcy, then your score may drop.

Many scoring systems look at how close you are to reaching your credit limits. If you are close to maxing out your credit cards or home equity loans, then your score can drop. If you have a long credit history with a record of on-time payments, that is also a good thing for your score.

The number and type of accounts you have could also raise or drop your score. Although it is generally considered a plus to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many scoring systems consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may have a negative effect on your credit score.

Every time you apply for credit or a loan from some business, credit reporting agencies will receive and inquiry from that business. Many inquiries over a short time is a signal that you are looking for more credit, which means you are looking to take on more debt. In most cases, this will lower your score.

Surprisingly, your score may get lower if you reduce the amount of available credit that you have. It makes sense that having too many loans and credit card debt may lower your score because it means a greater risk of not paying on time. There are some cases where you may be doing what you think is the right thing, but it may hurt your score. For example, if you have four credit cards with a a $10,000 limit but zero balance, and one card with the same limit but a $5,000 balance, you are using 10% of your available credit. If you decide to cancel all the zero balance cards, you are now using 50% of your available credit. Depending on your other financial activities, a credit reporting agency may focus on the increase in the percentage of available credit used and reduce your credit score.

Your Credit and Your Life
Think about your credit report as a story about your financial life. Not the story of you as a person but the story of your financial habits and behavior. It doesn't include your entire history. Credit reporting agencies may not care about your good behavior with credit cards you had 20 years ago, but they will care very much about your current cards. Bad financial events in the distance past may not matter much on your credit report now, but serious recent events like personal bankruptcies certainly will.

What About These Credit Repair Companies I Hear About?
The short story is there is no shortcuts to better credit, most of the companies that promise to improve your credit won't be able to do that, but you won't find out until long after they have taken your money.

Other Mortgage311.org articles cover credit repair scams. If you were denied credit or didn't get the kind of terms you think you deserve, it may be because of a mistake on your credit report, there are steps you can take to correct errors in your report, but the bottom line is that in most cases, you have the score that you deserve. If you make an effort to practice financial discipline and avoid the financial traps that lead to lower scores, your score will rise over time.