Understanding Your Credit Report Score

Your credit report score is a number that summarize your borrowing and repaying history in a given period. Lenders use your credit rating to determine your future credit performance -- how likely you are going to pay your bills on time. The higher your credit score, the better chance you’ll have to get approved for a loan with a lower interest rate.

Considering the impact of your credit on your financial life, there is no reason why you don't want to learn as much as you can about what credit score is, how it is calculated and what institution responsible for coming up with these three digit figures. Here are answers to various questions related to credit report and credit score.

What is a Credit Report Score?

This is a three-digit number that is generated by a relative scoring formula based on information found in your credit report and then compared to information from tens of thousands of individuals. The widely used credit scoring standard is the FICO score, invented by Fair Isaac Corporation.

Your FICO credit score indicates your creditworthiness. If you have a credit score range that is below average -- normal range is 300 to 850 and 720-above considered as good scores -- then lenders may not let you borrow more credit. Or, if your application gets approved, it would be for less favorable loan terms.

How Your FICO Credit Report Score is Determined

Your FICO credit rating is actually a grand tally of your credit report figures. It is the total of various figures divided by the number of items involved. The numbers involve can range from 300 to 850 and the formulas are derivations of the following data:

• 35% of the score is from your payment history. This data speaks of how well you handled credit. It has the largest percentage because lenders are more concerned on how timely and devotedly you pay your bills.
• 30% of the score is on your existing debts. There is a rule to keep credit balances at 25%, so having a handful of accounts at its seams won't help your credit score.
• 15% of the score is how long you have handled credit. The longer the time you handled credit is the better for your score. If you have been on credit for a long time lenders will judge you as an experienced money handler.
• 10% of the score is the number of inquiries. Frequent inquiries made to your report would mean a financial instability on your part. If you are that anxious to see credit reports that would also mean you are checking how lenders are reacting to your payments and credit.
• 10% of the score is the types of credit you currently have.

Free Credit Report and Free Credit Score

The Fair Credit Reporting Act (FCRA) lets every citizen of the United States to obtain a free credit report from each of the three major credit reporting agencies once every 12 months. You can also order free credit reports if you've been denied credit in the past 60 days, you are unemployed or on welfare, and your report contains inaccurate information due to fraud.

Getting your free credit score is, however, different from ordering your free annual credit report. There are no free credit scores. You can view your credit score for free through credit report bureaus but only for 30 day trial period. If you want to check your FICO credit score you will have to sign up for the trial period offer with a credit card.

So, if credit is your major financial sources it is wise that you regularly check your credit report and credit score. By keeping track of any errors, mistakes or inaccuracies you will be able to maintain a good credit score. With a good credit report score you'll be get the loan that you need every time you apply for one, with favorable terms.