Understanding your Credit Score

If you've applied for a loan recently, you may have heard a lot of talk about your credit score. What exactly is it? How does it affect your ability to borrow?

When you apply for a loan, such as car loan or mortgage, lenders look at your credit score to determine the risk involved with loaning money to you. Your credit score (also known as FICO to lenders) is based on your credit history and current history and allows a lender to determine whether to extend credit to you and what interest rate to lend funds to you.

How scores are calculated:

A credit score is based on information taken from your credit report. In general, this information includes:

  • Your payment history

  • Amounts you owe

  • The length of your credit history

  • New credit obtained

  • Types of credit used

Credit scores can range from 375 to 900 points with an average score between 620 and 650. In general, the higher your credit score, the better credit risk you are for a lender and the better rate you may receive.

If you have a credit score below 620 you may be considered a greater credit risk and may not either qualify or get the best rate available. Rest assured, there are ways to improve your score. You can:

  • Pay your bills on time

  • Catch up with missed payments as quickly as possible

  • Call your creditors immediately or see a credit counselor if you're having trouble making payments

  • Avoid opening too many credit accounts, such as department store charge cards

  • Keep lower balances on credit owed

  • Pay off revolving debt - you'll increase your score if you do rather than transferring it to other lenders

  • Stay on top of your credit report

Even if you think your credit score is good, a smart way to stay on top of your credit history and score is to obtain a copy of your credit report. To request a copy, contact one of the three major credit bureaus: