Understanding Your Credit Score and How it Was Determined

You probably already know that your credit history is kept in detailed records by three major credit bureaus. What you may not know is that in addition to all of that data, each credit bureau also assigns you a number, known as a credit score. That credit score is one of the most important factors in whether or not you can get a loan and if so, how much you will pay in interest. This article aims to help you understand your credit score and how it affects your ability to qualify for loans and lines of credit.

In theory, your credit score can run anywhere from 300 - 850. The average American's credit score is 692 and scores above 700 are good. Your score is calculated using a secret algorithm developed by Fair Issac Company, which is why the term credit score is nearly synonymous with FICO score.

The credit scoring system takes in to account many different factors of your financial history. The bulk of your score comes from your proven ability to pay bills on time. Late payments and failures to pay will seriously damage your scores. Next, the score considers your outstanding lines of credit and how much you still owe. Keeping low balances on credit cards is a good way to avoid loosing points for being overextended.

The length of time that you have had credit is also considered in your credit score. Young people with less of a credit history typically loose points in this area. It's important to establish some credit as early as possible and to maintain that well to prove over time that you can be trusted with larger loans.

Lastly, your credit score considers the types of credit that you have. A credit card is not the same as an auto loan which is not the same as a mortgage loan. You gain points for having a good history of well managed larger loans.

In actuality, because there are three different credit bureaus each with their own database, you have three different credit scores. Typically a lender will take the one in the middle or an average of the three when determining whether you qualify for a loan.

Each lender uses their own guidelines, but here's a standard break down of what your score means:

730+ - Excellent credit
700 - 729 - Good credit
670 - 699 - Average Credit
585 - 669 - Higher risk
Below 585 - Very High Risk

If you have average credit or above, you shouldn't have any trouble getting a loan. Those with good and excellent credit will pay less in interest than those who have smaller scores. If you fall in to a high risk category, it is a good idea to consider seeking help to repair your credit as you may find it difficult and costly to get any type of loan.