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What Is My Credit Score?

Your credit score is a little number with a big impact on almost everything you do that involves money. It affects your ability to get a credit card, a loan, and even a bank account. It determines the interest rate you will pay on loans and card balances. Yours may be good, bad, or in between, but you always need to know what it is. Knowing your score allows you to anticipate problems and to plan your financial life realistically.

Your credit report (or credit history) is a record of your financial practices, particularly how responsible you have or haven't been with your borrowing. Any potential lender can legally request a copy of your report, and the contents will affect your ability to obtain a loan, card, or mortgage. When a potential lender looks at your history, they'll see all current and past accounts in detail. Any foreclosures, bankruptcies, or accounts sent to a collection agency will be there; there's no sweeping that stuff under the carpet. It does change over time, though. If you've got a bad history, but manage to get your finances back in order and keep yourself in the green for seven years, the old stuff disappears.

Your score is based on your report and sums up your entire financial history in one little number. That little number is a big deal, and you need to keep track of it!

What's the Score?
Your score, again, is a number that represents your creditworthiness and allows a lender to assess the risk of lending to you. It is also sometimes called a credit rating or a FICO score. The lowest possible rating is 300, and the highest is 850. The higher the number, the lower the perceived risk of lending to you. Three major reporting companies, Equifax, Experian, and TransUnion, and a fourth, FICO, provides a commonly used system for generating a score. All three use the same basic criteria, but weightings may vary. Here are the criteria and weightings used by FICO:[1]

Your payment history is the single biggest factor, with a 35% weighting. Paying your bills on time every time is the single most important thing you can do to get and keep a good rating.

Utilization accounts for 30% of your score. Utilization is the percentage of the available limit that you use. Low utilization is good, and you should try to use no more than 10% or 20% at most of your limit on any given account. Not carrying high balances is essential.

The length of your history contributes 15%. This one may seem unfair if you are young and have never missed a payment, but a short history is still a risk factor.

Inquiries and the number of new credit lines in use represent 10%. Too many new lines make you look like you're desperate, and you want to avoid that. Only take on new credit when you need it or when it makes financial sense. The number of new creditors requesting your history is also considered in this category, as a surge in requests indicates that you are shopping for new loans or cards. Inquiries will have a greater impact on your score if you have a short history or have only a few accounts, but in general, each inquiry can cut five points from your score, a good reason to limit your applications![2] Not all inquiries are considered. Your inquiries are not, as are any inquiries by lenders considering you for a pre-approved offer, or requests made for account review or by an employer[3].

Your credit mix is 10% of the total. A responsible borrower should be able to manage different types of loans, and a balance between revolving credit (cards) and installment loans is a sign of good borrowing habits.

All of the major reporting companies use similar criteria, but there may be some differences in weighting. Equifax, for example, assigns a 15% weighting to your mix and only 5-7% to the length of your history.[4] These weightings are also averages, and the formulas the companies use can adjust the weightings based on the individual characteristics of the account. In every case, though, paying bills and loan installments in full and on time and maintaining a low utilization rate are the most important factors.

US law does not allow reporting agencies to consider your race, color, religion, national origin, gender, or marital status. The reporting agencies do not consider our age, ethnicity, religion, marital status, occupation or employer. FICO does not consider your salary, occupation, title, employer or employment history, or child support obligations, but some lenders may.[5]

What's a Good Score?
In general, the FICO scores look like this:[6]

Very poor, from 300-579, means you will almost certainly have to use a card secured with a deposit, and you may not be approved for any borrowing at all. If you are, you will pay a very high-interest rate. 17% of Americans are stuck in the "very poor" category.

Fair, with 580-669, places you as a subprime borrower. You will be able to borrow, but you will pay high-interest rates and face restrictive conditions. 20.2% of Americans are in this group.

Good, with 670-739, is getting into better territory. Only 8% of these borrowers will become delinquent, and lower interest rates and better terms come with that lower risk. The "good" category contains 21.5% of Americans.

Very good, scoring 740-799, indicates that you are a low-risk borrower, and you will get better than average rates and terms. 18.2% of Americans have very good credit.

Exceptional, or 800-850, is the top of the pile. At this point lenders are competing to get your business, and offering the very best deals. 19.9% of American borrowers are in this top category.

Some businesses use the VantageScore method, which is very similar but has a lower cutoff for moving from "very poor" to "poor" and a more liberal definition of "excellent."

What's the Impact?
Like it or not, it's pretty big. If your rating is low, so are your chances of qualifying for a mortgage, loan, card, and sometimes even a bank account. If you do manage to obtain a loan or mortgage, your interest rate will be quite high. Having a good score can make qualifying for loans and mortgages a walk in the park, and will reward you with the lowest rates available. That goes for cards, too. You could manage to grab one with a very low-interest rate--perhaps even 0%! On top of that, any car insurance premiums are lower too.

It matters, seriously. Just, for example, a typical American 30 year fixed-rate mortgage loan is roughly $310,000.[7] Using FICO's calculator, here's the interest rate and amount you'd pay for this loan with different credit scores:[8]

FICO Score Monthly Payment Total Interest
760-850 $1416 $200,698
700-759 $1455 $214,740
680-699 $1487 $226,078
660-679 $1525 $239,953
640-659 $1604 $268,374
620-639 $1707 $305,469

The difference between the top rate and the bottom over the life of the loan is a whopping $104,771. Yes, it matters!

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