Understanding Your Credit Score

Lenders determine your interest rate and credit limits based on a "credit score." A higher score means you are considered more likely to repay your loans on time, often resulting in a better rate. To understand how to strengthen your credit score, it's important to learn how it's calculated.

How is my credit score calculated?

Your credit score is usually based on the answers to these questions:

• Do you pay your bills on time?
• What is your outstanding debt?
• How long is your credit history?
• Have you applied for several credit cards in the last few months?
• How many and what types of credit accounts do you have?

A credit scoring system awards points for each factor. A total number of points helps predict how creditworthy you are — that is, how likely it is that you will repay a loan and make the payments when they're due.

Why is your credit score important?

Your credit score can affect your ability to get loans or open a checking account. A credit report is the first place that potential lenders, insurance agents, employers and landlords look in deciding whether to lend to, insure, employ or rent to you. Your credit score could also affect future jobs and insurance premiums.

In most cases, it takes seven years for negative information to be deleted from your credit report and up to 10 years for bankruptcy information to be deleted.

What can you do to improve your credit score?

Improving your score may take some time, but it can be done by paying your bills on time, paying down any outstanding balances and staying away from new debt.

What is a credit report?

Your credit report is one of the main factors used in determining your credit score. It is very important that you make sure your report is accurate before submitting credit applications.

Your credit report contains detailed information on your credit and personal history including:

• Identifying information (name, address, employer, Social Security number)
• Debt and payment history on credit cards, student loans, consumer loans, car loans, etc.
• Previous collections
• Tax liens, judgments and bankruptcies
• Inquiries for new credit

How does credit card behavior influence your score?

A creditor or insurance company may deny you credit or insurance because you are too near the credit limits on your credit cards and have applied for too many credit card accounts.

Because credit scores are based on credit report information, a score often changes when the information in the credit report changes. By keeping credit card balances low and applying for and opening new accounts only as needed, you can help change your credit report and your score.

Additional information:

By law, you are entitled to receive one free credit report from each of the three national credit reporting agencies per year. You can order them or view them immediately online at www.annualcreditreport.com after you provide identification information.

In addition to your free annual report, a federal law known as The Fair Credit Reporting Act (FCRA) also gives you the right to obtain your credit score from each of the three national credit reporting agencies, but you will have to pay a fee per score. When you buy your score, often you get information on how you can improve it. Credit reporting agencies don't share files, so you'll need to contact each reporting agency to make sure the information about you is correct.

If you have questions about your score, contact a credit reporting agency. The three national credit reporting agencies are:

Equifax
1-800-685-1111
www.equifax.com

Experian
1-888-397-3742
www.experian.com

TransUnion
1-800-888-4213
www.transunion.com

Information in this article was derived from the Federal Reserve Board, the Federal Trade Commission and the Mortgage Bankers Association Web sites.