When discussing about credit and finances, we often hear the term credit score. A high credit score means quick approval, access to better rates, and more opportunities. But what really is a credit score? How do credit reporting agencies calculate a person’s credit score?

You and Your Credit Score

A credit score is a three digit number that is based upon an individual’s credit report. Credit scores range from a low 300 to 850 where 300 to 600 is considered to be a low score and 650 upwards is considered as a high score. Of course, a low score makes a person a “high-risk” borrower and most lenders are not willing to approve applications from people who have a poor credit rating.

There are lenders who grant approval for people with poor credit but these transactions usually require some form of security from the borrower such as a property or an amount of money deposited and held by the lender. These deals are also often accompanied by higher interest rates, lower credit limits, and higher penalty costs to make up for the risks.

What is FICO Score?
FICO stands for Fair Isaac Company, which is the company that came up with the formula used in calculating credit scores. Although other methods are used in the past, the FICO score is the one that is widely used today.

Several factors make up a credit score. These are your payment history, level of debt, length of credit, inquiries, and types of credit contained in your credit report. Let’s take a look at each of these factors and how they influence your total credit score.

Payment history. Your payment history comprises 35% of your credit score. This is where the timeliness of your payment plays a big role. If you’re in the habit of delaying your payments, it can dramatically lower your total score.

Level of debt. This is how you put your allowable credit limit to use. It makes up 30% of your credit score. Financial specialists advise consumers not to go beyond 30-40% of their allowable credit limit as this can affect their credit score.

Length of credit. How long since you’ve had your credit history is 15% of your total score. This is why college students are encouraged to start establishing their credit early by applying for a student credit card. This is also the reason why it is not advisable to close old credit card accounts even when you don’t frequently use them.

Credit Inquiries. These are inquiries made by creditors whom you submitted applications to. It makes up 10% of your credit score. Thus, when applying for a loan or for a credit card, don’t submit too many applications to different companies all at once. Submit only to the lender that you seriously want to get an approval.

Types of Credit. Types or mix of credit is 10% of your credit score. Having more than one type of credit in your account boosts your score as long as you keep up with your payments because it proves your capability in managing debts.

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We often hear that a person’s credit report is very important because lenders, employers and even landowners check this document to measure one’s credibility and financial capability. But what really is inside your credit report? Do you really understand how it works? Let’s take a closer look on what your credit report is made of:

Inside Your Credit Report

Credit reporting agencies collect information from your creditors, debt collection agencies or from the court and compile all these information in one report. Everything listed here are considered to be accurate unless the owner of the credit report files a dispute about certain details in his report. However, if the information is correct –whether positive or derogatory – it will stay on your credit report for up to seven years.

Information that is contained in a credit report include a person’s full name, Social Security Number, date of birth, past and present home addresses, phone numbers, Driver’s license number, employment history and other personal details. If you do find any error, you must notify the credit reporting bureaus immediately and request that these details be corrected.

Liens, wages, foreclosures, bankruptcies and other public records are included in a credit report. It also contains a comprehensive summary of a person’s accounts from all his creditors or lenders regardless of what type of debt it is. It presents charges, penalties, date of payments, amount of debt, credit limit and everything that has to do with a person’s credit.

Credit Report and Inquiries

Each time a creditor or a company makes an inquiry about your report is also included. This is why consumers are warned against submitting too many applications from various lenders and banks all at the same time. Too many inquiries in your credit report can damage your score especially if you have been rejected by a lender.

However, personal inquiries are not regarded as negative and will not affect your credit score. In fact, it is recommended to inquire about your personal credit report at least twice a year so that you can be updated with the status of your credit history and score.

The three major credit bureaus are Experian, Equifax and TransUnion. Each of these agency works independently in reporting a person’s credit history. Thus, if you have any dispute about your credit report, see to it that you advise all three of these credit bureaus so that corrections can be made in your report accordingly.

The Fair Credit Reporting Act protects all consumers from fraud and ID theft by ordering all credit bureaus to do the necessary corrections immediately if a person claims a dispute in his credit report.

If you own a business, you can also apply for a separate credit history for your company from two major business credit trackers in the US- Dun and Bradstreet and Experian. The credit score for a business account is known as Paydex and this is the one used by lenders and financial providers in approving business loans.