What is a Credit Score? How to Understand Your FICO Score

Your credit score is a number that summarizes you as a credit risk. The most widely used credit score is your FICO score.

FICO scores evaluate your credit report and assign a score that creditors use to make lending decisions, including whether or not to lend you money and the terms and interest rate on a loan. FICO scores range from 300 to 850. A higher score represents a lower risk to a creditor.

The three major credit reporting agencies in the United States - Experian, Equifax and TransUnion - keep a history of your credit use. Your history with these companies is your credit report. Each agency assigns a FICO score based on the information they have about you in their system. Creditors use this report to determine your credit risk. In other words, how likely you are to repay the money on time.

Your FICO scores are based on your credit report with each credit reporting agency and how it compares to past credit reports of thousands of people. It is a complex mathematical equation that takes into account numerous bits of information in your credit report.  Your credit report must have enough information, specifically recent information for FICO to assign a score. You must have at least one account that has been opened and reported to a credit agency within the last six months. They do not consider your age, gender, race, nationality, marital status, income, child and family support or rental agreements.

The FICO system is a software program used by the major reporting agencies. The system makes FICO scores as consistent as possible with the three reporting agencies. You have three FICO scores. Your Equifax score is called the BEACON credit score. The Experian score is called the Experian/FICO Risk Model. TransUnion uses the phrase FICO Risk Score, Classic.

Each of these companies probably has different information about you. Lenders typically will pull your credit report and score from each agency. You should know what each of them is reporting and correct any errors and work to improve your scores before applying for credit for a major purchase.

Your FICO scores consider the length of your credit history, payment history, types of credit you are using, the amount owed and new credit applications. Thirty-five percent of your score is based on your payment history. Late payments do affect your score, but the overall history is taken into account. Even if you have no late payments showing on your report, that does not guarantee a perfect score. Your payment history also shows what types of accounts you pay on, collections, bankruptcy, foreclosures, wage attachments, liens and judgments. Frequency of late payments is considered as well as how recent late payments were reported are big factors in determining your score.

Thirty percent of your score is based on how much money you owe in comparison to how much credit you have. If you have used a large amount of your available credit, this can indicate to creditors that you may be overextended and are not a good credit risk. Fifteen percent of your score is based on the length of your credit history. The score looks at the age of your accounts and how long it has been since you used them.

Ten percent of your score is related to new credit accounts and recent requests for credit. Opening several new accounts in a short period of time or applying for credit with multiple creditors can lower your score. Other factors considered are the types of credit accounts you have, and if you have experience with both revolving and installment type loans.

Because the information in your credit reports changes, your FICO scores change as well. It is possible to lower your credit score quickly, but it takes time to raise it.

MyFico.com: Understanding Your Credit Score