Making Sense of Your Credit Score

Anyone with a track record of garnering credit or obtaining a loan has a credit report – and a credit score.

Your credit score tracks your borrowing, charging, and debt payment history. It's pretty cut-and-dried. A high credit score places you within easier (and cheaper) reach of your financial goals, like owning a home or buying a new car. A lousy credit score means you may not be approved for the loans and credit needed for such items, or if you are approved, you'll likely pay more money in interest to obtain that credit.

Based on your credit history, especially in how it compares to others, your credit score is designed to forecast your likelihood of paying back debt if financial institutions extend you credit.

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Your credit score is based on five key categories contained within your credit reports (as follows):

• Payment History: Accounts for roughly 35% of your score. This one is pretty self-explanatory, paying your bills on time will help keep your scores high, while late payments, charge-offs, and collections will hurt. If you're trying to improve your credit rating, avoid the later at all costs. And while this category makes up the largest single chunk of your scores, it's important to understand that 65% of your score is determined by other factors. Meaning that there's more to it than simply making your payments on time. Let's take a look at the other categories...
• Amounts Currently Owed: 30% of your score is based on the amount of debt you're currently carrying –or more specifically, the amount of money you currently owe your creditors. While this category looks at the total amount that you owe (credit cards, home loans, car loans, etc.), it's the credit cards –or revolving accounts – that have the most impact on your credit score. In order to maximize your scores in this section, you should keep your balances in relation to your credit limits as low as possible.
• Length of Credit History: Consisting of roughly 15% of your score, this category specifically measures looks at how long you've had credit. It does so by reviewing all of your accounts and looking at the opened dates. Obviously, the longer you've had credit, the more points you'll earn in this section. This is just one of the reasons why it's not a good idea to close old, good accounts. Why would you want to lose the good credit history?
• Types of Credit: Worth 10% of the points in your credit score, this section is looking for a healthy mix of accounts. Diversity is key – having a mix of different types of accounts including credit cards, auto loans, mortgage loans, etc., will insure you do well here.
• Searches for New Credit: This section accounts for 10% of your score. Basically, when you apply for credit an inquiry will post to your credit report showing that you're seeking credit. Having too many inquiries in a short period of time can hurt you. As a general rule of thumb, try to avoid excessively shopping for credit – only open a new credit account when you really need it. (Tidbit: By law inquiries remain in your credit reports for two years. However, only inquiries in the last 12 months are considered in your credit score calculation.)

Your credit score is essentially your "credit report card" on how you've managed your financial obligations – for good or for bad.

More Credit Score Resources

• How to Recognize Credit Repair Scams
• What is a Credit Score? (and how to get it)