Why Are Credit Scores Important? 

Credit scores are used by lenders to estimate if you'll pay off your loans and whether you'll pay on time. Since many lenders use credit scores as one factor in making loan decisions, knowing your credit score and understanding how it is computed can be helpful when you apply for a loan. 

High credit scores don't guarantee a favorable loan. In the end, lenders still decide whether or not to give you credit and how much they will charge for the credit. Don't assume that if you receive a low credit score from one of the services selling credit scores, that you only qualify for a high cost loan. Likewise, don't assume that because you received a high credit score that the lender is obligated to offer you only a good loan. 

Always shop around. 

Use your credit score as a general guide to better understanding your financial health, and as an indicator of steps you may be able to take to improve your credit reports. Improving your credit report will improve your credit score. 

What Determines Your Score 

Lenders look at the following five factors in your credit report to determine your score. All five factors are considered and no one piece of information by itself will determine your score. 

Payment History 

The payment information on credit cards, store accounts, car loans, finance companies, mortgages, etc. 

Information in public records, such as bankruptcy filings, other judgments, liens, wage attachments, and child support. 

The number of accounts in collection. Past due accounts: How many items are past due, when was your last past due item, how much money is past; how late are the payments. How many accounts never had late payments. 

The bottom line: Know your credit score and work to get a high score. 

Amount of Debt 

How many accounts have balances. How much you owe on all your accounts and how much you owe on specific kinds of accounts. 

Credit Account History 

How long ago were the accounts opened? How long ago were the accounts used? Recent Credit History 

How recently have you applied for credit and how often? Have you recently established a good credit history following past payment problems? 

Types of Credit 

The types of credit accounts you have and how many of each. The total number of accounts you have. 

Getting Your Credit Score and Credit Report Credit scores and credit reports are different. The credit score will give you the numerical score, an explanation of what the score means, and the top four reasons your score was not higher. The credit report has all the specific information used by credit bureaus to determine your score: payment history on each account, public records, and account summaries. 

You can get your credit score and credit reports from credit bureaus for a fee. Generally, costs range from $3.95 for the score only, to $8.50 for the report only, to $12.95 for both. (Under some circumstances your credit report may be free. Check the Web sites of the credit bureaus to see if you are eligible for a free report.) 

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 will change as your credit report is continually updated. 

How to Raise Your Credit Score Inspect your credit report and correct any errors. One study found that 29% of credit reports had serious errors. Pay on time. Late payments hurt your score more than anything, except not paying at all or bankruptcy. Apply for credit only when you need it. 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. 

For More Information Federal Trade Commission 

The Federal Trade Commission has a general overview of the credit scoring process, including what to do if you are denied credit.
URL: www.ftc.gov/bcp/conline/pubs/credit/scoring.htm 

To Order Credit Scores or Credit Reports:
Equifax: www.equifax.com 

Trans Union: www.transunion.com
(Credit reports only.) 

Experian: www.experian.com
(Credit reports only)