What is this Three-Digit Number?

Your credit score is a number that lenders use as a snapshot of your credit history that indicates whether you pose a low or high risk of defaulting on a loan. The higher the score, the more likely you are to pay your loan in full. When you apply for a loan, your lender looks at your credit score and uses it to determine whether or not to give you a loan, and also to determine what interest rate you will be charged. There is no one overall credit score, because different lenders use scores from different credit rating bureaus. In the United States, the three main credit rating bureaus are:

• Experian • TransUnion • Equifax

Each agency uses a slightly different method to determine credit scores, and the specific mathematical formulas are kept confidential.

What Information Goes into a Credit Score

Though each agency uses a slightly different formula, the following factors are weighted by percentage to calculate your credit score, which will range from 300 to 850:

• Payment history: 35% of score • Outstanding debt: 30% of score • Length of time you have had credit: 15% of score • How recently you've applied for credit: 10% of score • Types of credit you currently have: 10% of score

How Credit Scores Affect Borrowing

The better your credit score, the easier it is to get a loan and the lower the interest rate you'll pay. For example, on a 36-month car loan, those with the highest credit scores will pay an interest rate of around 10% lower than the interest rate paid by those with the lowest credit scores. This can make a difference of hundreds or even thousands of dollars in interest paid over the life of the loan.

How to Increase your Credit Score

Improving your credit score requires that you pay bills on time, avoid applying for credit too frequently, and have a high ratio of income to current debt. Additionally, time is a factor. The longer your track record for paying bills on time, the better your score will be. Each time you apply for credit, your credit score drops temporarily. How quickly it rises again depends on your history of payment and how dependable you are about paying off your new credit source.

How to Find Out your Credit Score

Each credit agency must provide you with a free copy of your credit report once per year. This report does not list your credit score. Normally you have to pay a fee of around $10 to find out your actual score. If you are turned down for credit, you will be told your score and given a reason why you were rejected for credit. Even if you do not want to pay to learn your credit score, you should review your free credit reports once a year and see if there are errors on it. Erroneous information must be removed from your credit report, and in many cases, removal of errors increases your credit score.

Sources:

http://www.nytimes.com/2009/01/06/your-money/credit-scores/primerscores.html?ref=creditscores
http://publications.usa.gov/USAPubs.php?PubID=3379
http://www.myfico.com/crediteducation/creditscores.aspx
http://money.howstuffworks.com/personal-finance/debt-management/credit-score.htm