What Your Credit Score Is

A credit score is a prized number for some and a serious hindrance for others. Weather you are trying to get car insurance, a new – or first - credit card, a new job or a cell phone, this number will affect your acceptance and interest rate.

Most people know the term credit score, but few know what it actually is. A credit score is a measure of credit risk based upon a credit report. Like everything else, this has become so complicated, using many more parties and bureaus and formulas then necessary. There are three main US Credit Bureaus; Equifax, Experian, and TransUnion. Equifax is a publicly traded company in the US (NYSE:EFX), Experian is a publicly traded company in London (LSE:EXPN) and TransUnion is a private company.

Each of these bureaus create a credit report. However each bureau may not have all of the same information, so your score can differ from one to another. The score is often derived from the FICO model; although there are other models; NextGen, VantageScore, and the Consumer Empowerment (CE) Score. The FICO score results in the usually known range of 300 – 850. VantageScore uses a range of 501 – 990 and classifies this through an A to F ‘grade.’ However, most other models mimic the 300 – 850 score. It is nice to know they are keeping this simple.

Moreover, in January 2009 the three bureaus changed their standard formula resulting in a dramatic change if your credit limit was changed. Since credit card companies were slashing limits at record paces last year, this was a significant change. Not only did your purchasing power diminish by having access to less credit, one’s score diminished resulting in the inability to get more credit.

So, we have one US listed, one British listed and one private bureau using an amalgam of statistical analyses to determine how creditworthy a person is. The actual formula is exclusive to the bureau or other credit agencies, but the FICO model has disclosed the approximate weighted average.

35% - Payment History

Make your payments on time. For this aspect, amount - as long as it is at least the minimum - does not matter. Pay your bills on time. This will reverberate that you are responsible.

30% - Credit Utilization

How much do you have outstanding compared to how much credit you have. Keep this to about 10% of your revolving credit. Consolidating credit card balances or, as mentioned above, having credit limits slashed adversely affects this aspect.

15% - Length of Credit History

The longer the track record of maintaining responsible use of credit, the better.

10% - Types of Credit Used

The more types of credit - revolving (credit cards), installment (student loan), or other - the better. Like an investment portfolio, diversification is key.

10% — Recent search for credit and/or amount of credit obtained recently

The more searches/inquiries or the more credit line increases by request of the consumer, the more your score is affected.

Now, the government has mandated that once a year everyone is entitled to a free copy of their report from each of the three bureaus. It would behoove you to get them and look over them. If you notice any discrepancy, call the credit issuer. If you need to close an account, have it read “closed by customer’s request.”

This score, although bastardized, is vital to landlords, cell phone carriers, employers and lenders. We all need a place to live and work. Who remembers anyone’s phone number anymore? That cell phone is almost as important!