What Does Your Credit Score Really Mean?

Some people are obsessed with their credit score, especially when trying to get out of debt.  Your credit score is important if you plan on borrowing – to get a car loan or to buy a home, for example.

I’ve sent away for my free credit report a couple of times to check for errors, but this report doesn’t include your credit score.

Curiosity got the best of me, so last week I went on the Equifax website and paid $23.95 to access my credit report and credit score.

Credit Score: What Does It Mean?

Your credit score indicates the risk you represent for lenders, compared with other consumers.  The two credit-reporting agencies, Equifax and TransUnion, use a scale from 300 to 900.  Higher scores are viewed more favorably.

My credit score is 788, which isn’t perfect, but most lenders would consider this an excellent score.  It’s important to keep a track of your credit score and if you don’t have any idea as to where you stand as far as credit worthiness is concerned, you can look up websites such as Credit Sesame to help you find out that info.

Based on my credit score though, I should be able to qualify for some of the lowest interest rates available and a wide variety of competitive credit offers should also be available.

What’s Impacting Your Credit Score?

A complex formula takes into account many factors described in your credit report, such as:

• payment history – carrying a balance on your credit card, or missing a payment
• any collection or bankruptcy recorded against you
• outstanding debts – the limit on your credit card (is your balance close to your limit?)
• account history – how long have you had credit?
• number of recent inquiries made about your credit report
• type of credit you are using – a mix of credit cards and loans

These factors don’t all impact your credit score in the same way.  The most important factors are your payment history, whether you have ever declared bankruptcy, and the amount of your outstanding credit balances.

Most lenders would consider anyone with excellent credit to be a very low risk.  If you’re in the market for credit, this is what you might expect:

• You may be able to obtain high credit limits on your credit card.
• Many lenders may offer you their most attractive interest rates and offers.
• Many lenders may offer you special incentives and rewards that are geared to their most valuable customers.

It’s important to understand that your credit score is not the only factor that lenders evaluate when making credit decisions.

Different lenders set their own policies and tolerance for risk, and may consider other elements, such as your income, when analyzing your credit-worthiness for a particular loan.

Improving Your Credit Score

Here are some tips on how to raise your credit score:

• Pay your bills on time.  Although the payment of utility bills – phone, cable and electricity – is not recorded in your credit report, some cell phone companies may report late payments to the credit-reporting agencies, which could affect your score.
• Pay your bills in full by the due date.  If you aren’t able to do this, make sure to pay the required minimum amount shown on your monthly credit card statement.
• Pay off your debts as quickly as possible.
• Don’t go over the credit limit on your credit card, and try to keep your balance well below the limit. The higher your balance, the more impact it has on your credit score.
• Reduce the number of credit applications you make.  If too many lenders ask about your credit in a short period of time, it can have a negative effect on your score.
• Keep a credit history.  You may have a low score because you don’t have a record of borrowing money and paying it back.

Your credit score only matters if you plan on borrowing, so if you have borrowed responsibly in the past you shouldn’t have any trouble acquiring credit.  Have you checked your credit score lately?  Do you care?