10 Things You Must Understand About Your Credit Score

Your credit score is your financial life-blood. It is the three digit DNA code containing all the information that makes up the anatomy of your credit. It goes hand in hand with your credit report to concisely summarize your credit identity. In its simplest form, your credit score is a three digit number that tells the world how credit-worthy you are.

1. What Your Credit Score Does - Your credit score is a summarization of everything that exists in your credit report. It helps potential lenders determine whether or not they want to lend to you. In addition, your score also affects the line of credit extended, the interest rate charged, payment terms and more.

2. Where Your Credit Score Comes From - Three separate credit bureaus, Equifax, Experian and TransUnion use their own proprietary mathematical formulas in determining your score. They then sell this information to requesting lenders that you apply to (mortgage lenders, credit cards issuers, etc).

3. Understanding Your Credit Score Numbers - Credit scores are given in the range between 350 to 850. The higher the credit score the better. It is commonly held that any score above 720 is excellent and you will be looked upon by lenders as a very credit-worthy individual. It basically means you will get the very best terms available.

4. How Credit Scores Are Determined - As noted earlier, all three credit reporting agencies gather financial information pertaining to your credit history and use their own mathematical formulas to come up with a three digit score for you. It is not uncommon for one bureau to have a score that differs by 50 or more points from another. Most scores fall in the range between 600 - 720.

5. Your Credit History - This is basically the body of your credit work. The sum total of all the credit you have had. As a general rule, the longer and healthier your credit history is, the more you will be looked upon as a desirable customer.

6. Your Payment History - Your payment history is obviously the chief component that determines your credit-worthiness. If you have late payments, or worse yet, missed payments on your credit report, your credit score will definitely be adversely impacted.

7. How Much Outstanding Credit You Have - Your credit-worthiness can be negatively affected by the amount of outstanding debt that you have. As a general rule, if you owe more than 50% of your credit limit on a credit card it will not be looked upon favorably.

8. How Many Existing Accounts - Credit bureaus most definitely look at how many existing accounts you have. Even if you are not using them, having many accounts represents a greater credit risk in the eyes of the credit bureaus. Having too many accounts will affect your credit score in a negative way.

9. New Credit Accounts - While new account activity isn't necessarily a bad thing, potential lenders will take a closer look at it. The reason being is that they are concerned with the amount of debt you are taking on and may question your ability to make on time payments.

10. Credit Inquiries - This can go hand in hand with risk assessment. A large number of inquiries can signal financial distress. You've heard of the old saying, "robbing Peter to pay Paul". This is the kind of activity that can send up red flags to potential lenders.
Be aware that any and all credit activity can have a profound impact on your credit score.