Credit Score Explained

What you pay for a house, a car, clothes, even groceries, will likely depend on three digits you probably don’t even know. Your credit score explained.

Your credit score is a number that banks use to determine whether you qualify for credit—and if so, how much interest they’ll charge you. Insurance carriers and phone companies rely on the scores to decide if you’re a good credit risk. A prospective boss or landlord may turn you down if your score doesn’t measure up.

what is a credit score number

How is your score calculated?

Your score reflects how well you’ve managed your debt. Black marks such as late payments remain on your record for seven years. (For some forms of bankruptcy, it’s ten years.) There are factors that don’t affect your score: employment status, income, debit card habits, savings, bounced checks, overdraft fees, utility bills, and late rent (if the issue hasn’t gone to court).

Here’s what the bureaus use to calculate your score.

1. Payment history (35 percent)

The lowdown: The bureaus factor in when you last paid an account late, how often you pay late, and by how many days.

The strategy: Set up automatic payments to guarantee you’re never late. If you have a 760 FICO score, for example, you could probably qualify for a 4.9 percent mortgage. Drop 100 points (after one skipped or late credit card payment) and you’d be lucky to get 5.5 percent. Pay bills on time and you’ll improve your score within months.

2. Total debt (30 percent)

The lowdown: In general, higher debt loads work against you.

The strategy: Lenders look at your “usage ratio”—how much debt you owe on your credit cards compared with the total amount you could borrow. To keep your ratio low, don’t max out your cards, and don’t cancel cards you don’t use.

Say you owe $100 apiece on five credit cards, each of which would let you borrow up to $1,000. Your overall usage ratio—debt ($500) divided by credit limit ($5,000)—is 10 percent. Cancel all but one card and your debt is still $500, but your available credit drops to $1,000. Your usage ratio is now 50 percent, enough to lower your score. A lot.

The people with the best scores tend to use no more than 9 percent of their available credit. Go above 50 percent, and your score is headed for a nosedive, says Steve Bucci of MMI Financial Education Foundation, a credit-counseling firm. This can cause your credit score meaning to get a lot more complicated.

3. Duration (15 percent)

The lowdown: The longer you’ve had an account, the better. A late payment on a two-year-old account will hurt your credit score more than if you’d had the card for two decades.

The strategy: Avoid opening new accounts unless necessary, and keep your oldest credit cards active (assuming you pay any new charges in full). “In this environment, if you don’t use a card, you lose it,” says Frank Remund of Seattle’s Credit IQ, a fee-only financial advisory firm. “To demonstrate you’re still using the card, sign up to have it automatically make one utility payment every month.”

4. New credit (10 percent)

The lowdown: Multiple requests for credit mean you’re a greater risk. FICO looks at the number of new accounts that you have opened as well as the number of requests, or inquiries (there are two kinds), for your credit score or report.

The strategy: “Hard” inquiries—when you actually apply for new credit—can ding your score. The best way to protect yourself is to squeeze your applications—whether for a mortgage or a car or student loan—into the same 45-day period so they’ll count as a single inquiry.

5. Types of credit (10 percent)

The lowdown: FICO looks at the number and “quality” of each type of account. For instance, a credit card from a national bank carries more weight than one from a department store.

The strategy: Revolving accounts (credit cards) tend to count more than installment loans (mortgages, car loans, student loans) because they’re better predictors of your debt management. If your mix of debt is considered “off balance,” it can hurt you. For example, it’s possible to have too many credit cards but not enough of other types of loans (four or five cards is probably okay, says Adam Jusko of, depending on how long you’ve had them).

Get the real free

Check all three of your credit reports at, the only site authorized by federal law. This will help you better understand your credit score meaning. Don’t be fooled by wacky commercials and computer ads for other “free” sites. You get one free report per bureau per year; pull a different one every four months to catch problems sooner.

article sources:
Wall Street Survivor (
Reader’s Digest (

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