Your credit is checked anytime you apply for a mortgage, car loan or credit account. Potential employers may also check your credit, as do banks when you want to open an account. Your credit score, or rating, is a summary of your credit history. Lenders rely on credit scores to assess risk. They want to know how likely you are to repay the money you want to borrow.
Your credit score is based on the contents of your credit history, or credit report. Consequently, a good credit history results in a high credit score. Although there is more than one credit scoring system, the Fair Isaac Corporation (FICO) score is most widely used. A FICO score ranges from 300 to 850. The main factors making up FICO and other credit scores are whether you pay bills on time, the amount of debt you carry and the length of your credit history. Other factors include the frequency with which you open or close credit accounts and the types of credit you have.
Good Credit Scores
According to the Credit Scoring website, the average American's credit score is around 720. A good score is anything over 700, and a score of 770 or above is considered excellent. With a high credit score, you can obtain the credit you need almost all the time, at favorable interest rates. The best interest rates go to people with credit scores in the high 700s.
Poor Credit Scores
Once your credit score falls below 690 to 700, lenders have concerns about your ability to repay a loan. With a credit score in the middle 600s you can usually finance a car and get a mortgage or credit card, although you may pay a higher interest rate. A score below 620 is called "subprime" and is considered poor. If your credit score is subprime, many lenders will not extend credit and you may find it difficult to finance a home. Those who do extend you credit will charge you significantly higher interest.
Guarding Your Credit
Paying bills on time and otherwise using credit in a responsible manner are the best ways to raise your credit score. However, you should monitor your credit history carefully. Errors on your credit report can lower your credit score. You can get a free credit report once every year from each major credit reporting agency (Experian, Equifax and TransUnion). These reports are available from the Federal Trade Commission's authorized provider, Annual Credit Reports (see Resources). If you discover an error, contact the credit bureau and have the mistake corrected.
Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.