What Is A Credit Score?

Your credit score and your credit report are two different things.

A credit report is information about your credit activity. This information from lenders is used to calculate your FICO® (Fair Isaac and Company) score. FICO® scores range from 300 to 850, with a higher number indicating a better score. Lenders use this credit score to evaluate your creditworthiness, or your ability to repay a loan. A higher score means you are a lower credit risk so companies will charge you less to borrow money. You can obtain your score from the credit bureaus, generally for a small fee.

So what is considered a "good" credit score?

Mortgage News Daily assesses scores as follows: 
750-850 – Excellent
720-750 – Good-Excellent
690-720 – Good
620-690 – Fair
300-619 – Poor

Learn more about credit scores from myFICO.

What factors make up your credit score?

There are essentially five categories of information that comprises your credit score.

Payment History35%
Amounts Owed30%
Age of Accounts15%
Types of Credit In Use10%

The most important factor is your payment history, that is, if you pay your bills in a timely manner. Late payments, collections actions and bankruptcy filings all have a very negative impact on your credit score.

The amounts owed is the next largest factor in determining your score. Both the amount of debt you are carrying and the credit to debt ratio are taken into consideration. If you are maxed out on a credit card, or close to it, that could count against you. Owing $2900 on a credit card with a $3000 limit will impact your credit score more negatively than carrying a $2900 balance on a credit card with a $5000 line of credit.

Credit bureaus also consider the age of your credit accounts, whereby the older the account the better it is for your score. For that reason, it is not always a good idea to cancel an account once you have paid off the balance in full. If you have had that credit card for awhile, you might want to just cut up the card but leave the account open.

Every time you apply for a credit card or loan the creditor or financial institution requests to see a copy of your credit report. Each such request is considered an "inquiry". Too many inquiries can hurt your credit score.

Another factor that plays into your credit score are the types of credit in use or account diversity. Having both "installment loans" (e.g. mortgages, car loans, etc.) and "revolving credit" (e.g. credit cards) helps your score.