What Goes Into Your Credit Score

We hear it all the time on the television and radio that having a good credit score is important. But what exactly does that three-digit number mean and how is it calculated?

Credit reporting is maintained by the three major credit reporting agencies – TransUnion, Equifax, and Experian. All three credit reporting agencies report credit scores slightly different, but the credit score calculation most commonly used by creditors is the FICO score.

Credit scores are a rating of your credit worthiness based on a scale ranging from 300 to 850. A “good” credit score is typically in the high 600’s and above, whereas a “bad” score would be in the 500 to 600 range.

Traditionally, mum’s been the word as to how exactly the score gets calculated, and what types of activities or issues impact the score. However recently, FICO has illuminated the public as to both how the score gets calculated and exactly what happens to this score when common negative mistakes or activity appear on your credit profile.
 
Your credit score is a calculation of the following, in order of importance: Payment History (35%), Amounts Owed (30%), Length of Credit History (15%), New Credit (10%), and Types of Credit Used (10%).

All of these factors are read from your credit report and calculated into your credit score.
 
Negative results on your credit report, such as late payments and settlements, harm your credit score. For instance, a 30-day late payment can hurt your credit score by 60 to 110 points; foreclosure reduces your score 85 to 160 points; a maxed-out credit card causes 10 to 45 points of damage; bankruptcy has the most negative impact on your score. In addition, the higher your score is at the time of the mistake, the greater the point loss that occurs.

It’s more important than ever to maintain your credit score. No longer are creditors just looking at your score, but a poor credit score can also make it harder to get a job or rent an apartment. You are even at risk for being charged more for auto insurance.

The most striking example of this is rates on financing a car. For example, according to FICO, someone with a “good” score (660 or above) will be able to finance a car for 36 months at an average of 5 to 8.5 percent APR. Someone with a “bad” score (659 and below) looking at the same loan will be receiving somewhere between 12 to 19 percent APR.
 
Once a year, you can obtain a free copy of your credit report at www.annualcreditreport.com. The report is free, but you do have to pay a fee to obtain your credit score. It’s important to review your finances, look at what debts you have and find out your credit score so you are able to see the big picture and take stock in your financial future.

Editor's Note: Lynette Baker is the director of marketing for RethinkingDebt.org.