How do credit grantors decide whether to give you credit or lend you money? It’s all in the score—your credit score, that is.

Whether you like it not, the credit industry is keeping tabs on you. Read on to find out how your credit score could save—or cost—you thousands of dollars or more.

What is a credit score?

It’s a number that represents your creditworthiness. It answers the question, "How likely are you to repay the loan?" The higher the number the better, and it changes over time, depending on your payment history.

How is my credit score different from my credit report?

Your credit report is a record of your bill-paying history, both positive and negative. It lists identifying information, employers, creditors and payment history, bankruptcies, judgments, liens, and lawsuits. The credit report that potential lenders view will contain inquiries you initiate, such as loan applications and credit card applications, but inquiries you don’t initiate—such as preapproved offers—only appear on the credit report you order and therefore won’t affect your credit score.

What is a FICO Score?

A FICO score is a credit score developed by Fair Isaac Corporation to determine how likely you are to pay your bills on time. Lenders calculate the three-digit number by using scoring models and mathematical tables that assign points for various pieces of information that predict your future credit performance.

What’s considered a good score?

A FICO score of 720 or higher typically means your credit risk is very low, and you’ll likely be offered a preferred, lower interest rate. However, in light of the economic downturn, a score of at least 760 may be needed for the best rates. A FICO score in the range of 660 to 719 is still acceptable in the eyes of most lenders but you may pay a slightly higher interest rate. A FICO score in the range of 620 to 659 indicates you’re at higher risk of defaulting on a loan. If your FICO score is less than 619, you’re generally considered a very high risk for default. You’ll either be denied credit, or you’ll get it but at a much higher interest rate than those offered low-risk borrowers.

Is FICO the only game in town?

No. There are two main credit scoring systems: FICO (Fair Isaac Corp.) and VantageScore.

1. A FICO score ranges from around 300 to 850.
   Typically, anything higher than around 720 is considered a good credit risk. The average FICO credit score is about 723 (according to myfico.com).
2. A VantageScore ranges from 501 to 990.
   It’s based on standard grades A to F (A = 901 to 990, B = 801 to 900,    C = 701 to 800, D = 601 to 700, and E = 501 to 600).

Be careful—the same score from the two systems may mean different things. For example, a score of 760 from FICO means you’re an excellent credit risk, but the same score from VantageScore gives you a grade of "C." So make sure you know which score (FICO or VantageScore) you’re viewing.

What if I’m just starting out and don’t have enough credit or loans to generate a credit history?

Fair Isaac has introduced the FICO Expansion score, based on deposit account records, payday loan repayments, purchases made on payment plans, and other nontraditional data. This new score will help millions of people of modest means who may not be served by traditional financial services, including people who have been recently divorced or widowed, immigrants, young adults who are just beginning to handle finances, and people who prefer to pay for services with cash.

What kinds of things affect my credit score?

Five variables affect your score:

1. Payment history (about 35% of your score). It answers the question, "Do you pay your bills on time?" If you’ve missed payments in the past, get current and stay current. The longer you pay your bills on time, the higher your score.
2. Amounts owed to creditors (about 30% of your score). It answers the question, "Do you owe a lot of money to a lot of people?" If you have high balances on credit cards that are close to their limits, your credit score will suffer.
3. Length of credit history (about 15% of your score). It answers the question, "How established is your credit history?" If you’re just starting out using credit, your score probably will be lower than someone who has a longer history of paying bills.
4. New credit (about 10% of your score). It answers the question, "Are you increasing your debt load?" A flurry of activity and inquiries on your credit report raises suspicion.
5. Types of credit in use (about 10% of your score). It answers the question, "Do you have a "healthy mix" of credit?" A healthy mix may include a mortgage, a credit card or two, a personal loan such as a car loan, and perhaps a retail card.

If I apply for credit, will my credit score drop?

According to FICO, if it does, it probably won’t drop much. Multiple inquiries in a short period of time typically are treated as a single inquiry and will have little impact on your credit score. For example, the score counts multiple auto or mortgage inquiries that fall in a typical shopping period as just one inquiry; older versions of the scoring formula count the shopping period as any 14-day span, and newer versions count the shopping period as any 45-day span. Each lender chooses the version of the FICO scoring formula it wants the credit reporting agency to use to calculate your credit score.

Who uses my credit score?

Lenders, primarily. But other users include employers, landlords, and other businesses that want to evaluate not only your creditworthiness but your financial responsibility in general.

How can I improve my credit score?

Pay all your bills—on time. You can’t improve your credit score dramatically in a short time, but responsible actions over time can result in a higher score. Also, keep your balances low on credit cards and other revolving accounts. Routinely staying close to the limits on your cards will lower your score.

Is there only one score per person?

No. Lenders may use FICO scores, create their own scoring models, or ask FICO to customize a scoring model for them. As a result, your credit score can vary by 30 points to 100 points between the three credit reporting bureaus (Experian, Equifax, and TransUnion), depending on the scoring criteria used.

How do I order my credit score, and what does it cost?

You can order one individual score (FICO Standard) directly from FICO for $15.95 at myfico.com/Products/Products.aspx. Here’s a tip: Call FICO at 800-319-4433 and ask a customer service representative for the promotion code to get your score for $14.95. Normal business hours are 8:00 a.m. to 7:00 p.m. (CST) Monday through Friday, and 9:00 a.m. to 6:00 p.m. Saturdays.

Or, order your credit score when you request your free annual credit report from annualcreditreport.com or from any of the "big three" credit reporting agencies. Prices vary and can change at any time, so shop around.

The people at your credit union also may be able to provide you with your score and discuss it in relation to your overall credit picture.

Your lender may share your credit score with you; ask when you apply for a loan.

A word of caution: A simple Internet search for "credit score" will result in a list of many sites. Many of them sell packages of credit products that include not only credit scores but credit reports, credit monitoring services, and identity theft insurance. It’s possible that some searches may even lead you to scam artists who try to steal your personal information, such as your Social Security number and other identifying information. Stick with reputable sites such as FICO and the credit reporting agencies.

If I check my credit report, will that lower my credit score?

No. It’s a good idea to check your credit report regularly for accuracy and for signs of fraud. In fact, maintaining an accurate credit report is part of responsible credit management.

Useful resources:

Fair Isaac Corp. fairisaac.com or myfico.com

Experian experian.com

Equifax Equifax.com

TransUnion Transunion.com

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Published January 21, 2008

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