What is a Credit Score?

Please note that this information on credit scores is only applicable to people living in the United States.

A credit score is a number that is based on your credit report that is used by banks and credit card companies to gauge your creditworthiness. It is designed to represent the likelihood of a person being able to pay off their debts, thus it is used by banks and credit card companies to decide whether or not an applicant receives a loan or a credit card. It is also used to determine what interest rate is given and what amount may be allowed for a loan or a credit card limit.

In the United States there are actually multiple different credit scores with the most well known being the FICO score.

Your FICO score is determined by the following factors:

1. The punctuality of your past payments on credit cards and loans. Along with the late fees often given for being late with a payment this is a very good reason to pay all your pills on time.

2. Your amount of debt compared to your amount of limits. For example if you have 2 credit cards with limits of $5,000 & $3,000 then your total credit limit would be $8,000. That number is compared with your balance of debt. If you owe $4,000 on one card and $2,000 on another then that is a total of $6,000 in debt. You divde the debt total ($6,000 in this example) by the limit total ($8,000) for a debt/limit ratio of 75%. This is why your credit score can shoot up a lot when you first get a big credit extension on a credit card or if you pay off a lot of your credit cards.

3. Length of credit history. This is why it’s a good idea to get a credit card as early as possible. It’s the easiest way of starting a credit history.

4. Types of credit used.

5. Credit requests. Requesting a credit card can lower your credit score.

Along with these factors; bankruptcies, foreclosures, and judgments will effect credit scores significantly.

How low and how high do credit scores go?

The lowest possible credit score is 300 and the highest is 850. The average credit score is 678 and the median credit score is 723. That means half of Americans have a credit score below 723 and the other half have a credit score above 723. If you are are right at 723 that means you have a very average credit score. Using the median score as a comparison is more accurate than using the average credit score because the average credit score is brought down significantly by those with very low credit scores.

How do I find out what my credit score is?

You can obtain your credit score for free from Experian at www.FreeCreditReport.com