Credit Scores: Before You Borrow
Your credit score is based on the information in your credit report. It is a number, usually between 300 and 850, that is used by creditors to decide whether to give you credit and at what interest rate – the higher the number, the better your credit rating.
Why Credit Scores Are Important
Credit scores are used by lenders to predict if you’ll pay off your loans and whether you’ll pay on time. Since many lenders use credit scores as one important factor in making loan decisions, knowing your credit score and better understanding what determines it can help you get a good loan.
Your credit score is also used by some credit card companies, phone companies, insurance companies, landlords and employers as a way to determine your “worthiness” for a credit card, cell phone account, car insurance or a job.
Because so many others know – and use – your score, you should know it, too. Before borrowing money, find out what score your lender will use – there are many out there – and be sure to check that score to see how you rate. Your scores can also change from day to day. One common score lenders use is the FICO score. For a fee, you can get yours at www.myfico.com.
Even if you’re not making a big purchase, it’s still useful to know how others see you. Use your credit score as a general guide to better understand your financial health. It can help you know what steps to take to improve your credit options. Improving your credit report will improve your credit score.
What Determines Your Score
Many factors in your credit report determine your score. No one piece of information by itself determines your score.
Payment history
- Information from credit cards, store accounts, car loans, finance companies, mortgages, etc. about how timely you make payments.
- Accounts in collection or past due.
- Information in public records, such as bankruptcy, judgments, liens, wage attachments, or child support orders.
Amount of debt
- How much you owe on all your accounts.
- How much credit you have available to use.
Credit account history
- How long ago you opened and used your accounts.
- How recently you applied for new credit.
- Recent good credit history following past payment problems.
Types of credit
- The different types credit accounts you have.
- The total number of accounts you have.
Getting Your Credit Score and Credit Report
Credit scores and credit reports are different. The credit score gives you a number score from 300 to 850. When you buy your score, you get an explanation of what the score means and the top reasons your score was not higher. The credit report has specific information credit bureaus (now called consumer reporting companies) collect from your creditors.
A new law requires the credit bureaus to give you a free credit report once a year. These free credit reports are being phased in across the country from west to east between December 2004 and September 2005.
You have to pay to get your credit score. Your score from one credit bureau may not be the same as your score from another since each bureau collects its own data that is used to figure the score. And scores change as your credit report is continually updated.
How to Raise Your Credit Score
- Inspect your credit report and correct any errors. Your credit report is the basis for your credit score. One study found that 29% of credit reports studied had serious errors.
- Pay your bills on time. Paying late hurts your score more than anything, except not paying at all or bankruptcy.
- Apply for credit only when you need it.
- Lower the balances on your credit accounts.
- Don’t put all of your spending on a credit card. It can make you look deep in debt, even if you pay it off each month.
AARP Resources
Check Your Credit Report
Find out how to order and improve your credit report.
Stealing Your Life
Frequently checking your credit reports can alert you to possible theft of your identity.
Avoid Predatory Loans
Knowing your score improves your odds for getting a better loan.
Give Yourself Credit
Use your credit and credit cards wisely. Tips on how to select a credit card and safely use it.
Additional Resources
Federal Trade Commission
The Federal Trade Commission oversees the credit scoring process, including what to do if you are denied credit.
Fair, Isaac and Co.
Fair, Isaac, and Co., the company that developed the credit score, describes the factors used to determine your credit score.
