Your Credit Score

If you have ever tried to borrow money, apply for a mortgage, get a credit card, or buy something on credit, then someone has probably pulled your credit score. Your credit score (at its most basic) is the odds which financial institutions puts on your ability to pay back money they lend to you. The higher the score, the more likely you are to pay. These numbers come from information found in your credit report.

Your credit report summarizes all of your financial history for the last seven years. The exceptions to the seven year rule includes some good credit information (like closing an account that was in good standing) and Chapter 7 bankruptcy information – both of which stay on your history for ten years.

Credit reporting companies take the information on your credit history and use a formula to determine a three digit credit score that lenders then use to help determine if you will get a loan and at what interest rate. Up until recently, the process that was used to determine the score was an industry secret. In 2000, a California law gave applicants the right to see their credit score, and the new federal laws give you even more rights to your own information (and to the factors that determine your score).

The components that determine your credit score are pretty simple. The number ranges from 300 to 900 with approximately 35% of that number being based on payment history, 30% on outstanding debt, 15% on the length of time you have had credit (the longer the better), 10% on the number of inquires on your report, and 10% on the types of credit that you currently have. The companies then compare this to credit performances of other consumers with similar histories and profiles to reach your magic credit score.

You can check your credit score for free at www.annualcreditreport.com.