Credit scores give lenders, property owners and employers a quick way to evaluate your financial health. Several companies offer credit scores, and each has its own scoring system. As a consequence, your credit score isn't one number, but a variety of numbers issued and used by different organizations.
Your credit score is a number that reflects your financial history and creditworthiness. Credit scoring companies use information from your credit reports to determine your score. Certain types of information have a greater effect on your score than others. For example, requests for credit and information about newly opened accounts comprise only about 10 percent of your FICO score. On the other hand, your history of paying bills on time accounts for 35 percent of your score.
The FICO score, previously known as the “Fair Isaac Score," is a common credit scoring system developed by the Fair Isaac Corporation. Fair Isaac does not determine your credit score on its own. Instead, prospective creditors request your FICO score from credit bureaus that use Fair Isaac's proprietary software to generate the score. Many banks and mortgage companies rely on FICO scores to make credit decisions.
Other Credit Scores
While FICO is the best-known credit scoring system, it isn't the only one. Each of the three major credit bureaus in the United States — Experian, Equifax and TransUnion — generates its own credit score, which may or may not be similar to your FICO score. The credit bureaus have also developed a scoring system called VantageScore, based on reports from all three bureaus. This means that if you are shopping for a loan or a mortgage, different lenders may be pulling different credit scores, which can result in very different offers from these lenders. Similarly, if you buy your credit score from a credit bureau, the score your lender receives could be considerably higher, or lower, than the score you just bought.
Some lenders give less weight to credit scores than others; they are more interested in what your credit report actually contains than in the number it generates. For example, a lender who sees that your previous credit problems were due to high medical bills may be more lenient in granting you credit, even if your credit score is low. The same often holds true for property owners and employers, who may be more concerned about a history of judgments or evictions than about late payments on a department-store charge card.
Raising Your Score
Because your credit scores reflect the information in your credit reports, it's a good idea to check your reports regularly to ensure that they are free of errors. If you find errors on a credit report, dispute the inaccurate information with the credit bureau that issued the report. You can do this in writing or online. Other ways to raise your credit score include reducing the amount of your available credit that you use. Keep your credit card balances lower than 30 percent of your credit limit. Don't close old accounts, as this reduces your overall available credit and can hurt your credit score. If your credit report shows a late payment to a creditor with whom you otherwise have a good relationship, contact that creditor and ask her to delete the late payment from your report. Many creditors are open to this sort of "goodwill" request, and it can really boost your score.
Lainie Petersen writes about business, real estate and personal finance, drawing on 25 years experience in publishing and education. Petersen's work appears in Money Crashers, Selling to the Masses, and in Walmart News Now, a blog for Walmart suppliers. She holds a master's degree in library science from Dominican University.