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What is a credit score

A credit score is a numerical term based on an arithmetic analysis of a person's credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information typically sourced from three main credit bureaus Equifax, Experian, and Transunion.

Good Credit scores are becoming a necessity in today's way of life. Lenders will base their decision on some type of credit score. The credit score also determines the interest rate in which the lender will charge you.

What is a good credit score

Credit scores range anywhere from about 300 to 850. The higher your credits score the better. When lenders talk about your credit score they usually mean the FICO score developed by Fair Isaac Corporation. It is today's most commonly used score. Below is a table of approximate ranking. The average American will most likely have a score around 680.

There are many types of credit scores: Fico, Beacon, Empirica, Vantage, Nextgen, etc. They are all developed by independent companies, credit reporting agencies, and even some lenders. As a rule, the higher the score, the better.

• Each credit reporting bureau has a credit score for you and each score may be different based on what each bureau has on you. Lenders may make a credit based loan decision on a single bureau's score; others often will look at all three scores.

• Your credit score changes when your information changes at that credit reporting agency. This means the more negative items you have it goes down and the more positive or the removal of negative it goes up.

• Want a free credit score Credit Karma provides truly free credit scores to consumers direct from the credit bureaus. Your scores are retrieved securely with no hidden fees.

What makes up your credit score

Generally, there are five factors that influence your credit score. The biggest factor is payment history. Payment history accounts for 35% of the score. Second, is the amount of money the borrower owes the lenders. Amount owed accounts for 30% of the score. Third, is the length of credit history. Length of credit history accounts for 15% of the score. Fourth, new credit obtained within the last 12 months. New credit accounts for 10% of your score. Lastly, the remaining 10% is the types of credit used; bank credit card, Installment loans, mortgages, department store credit cards, etc.

Why does your credit score matter

Credit scores affect whether you can get credit and the amount of interest you pay for credit cards, auto loans, mortgages, etc. Higher credit scores mean you are more likely to be approved and pay a lower interest rate on new credit.

Lenders look at your credit scores all the time. They look at your credit scores when deciding whether to change your interest rate, credit limit on a credit card, or whether to send you an offer through the mail. Having good credit scores makes your financial future a lot simpler and can save you money in lower interest rates. That's why it is an essential part of your financial well being.