Credit Score Basics

Maintaining a good credit history helps ensure borrowers have access to credit when they need it. But how do creditors decide whether to extend credit and loan you money? Their decision is based largely on your credit score. Credit bureaus, creditors and insurers assign everybody a numerical credit score based on the information contained in their credit report. A high credit score reflects lower risk for the lender and improves the borrower’s chances of getting approved for a loan with better financing terms than someone with a lower score.

Credit Score Factors

Credit scorers determine a consumer’s credit score by performing a complex statistical analysis of all of the information in that person’s credit report. Following are several factors that help determine credit scores:

• Type, age and number of credit accounts and loans held.
  
• Current account balances.
  
• Payment history.
  
• Collection activity.
  
• Amount of outstanding debt.

The credit scorers analyze and compare this information to that of other consumers to help determine the likelihood you will repay your loans on time. The result is a credit score number lenders can consider before extending credit.

Improving Your Credit Score

Each credit scorer uses a different system for determining credit scores. Because their “secret formulas” are proprietary, they don’t share specific details about what factors are the most important to their analysis. However, it is known that many scoring systems consider the following factors most important:

• History of on-time payments.
  
• Amount of current debt compared to total credit available.
  
• Length of credit history.
  
• Number of recent credit applications.
  
• Total number of open credit accounts.

Improving your credit score can be achieved by paying bills promptly and, thus, decreasing account balances; avoiding opening new credit lines; and demonstrating a history of positive credit use. Increasing your credit score may not happen over night, but it is possible over time.

Write to Timothy Dun at timothy@creditdonkey.com

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