What Your Credit Score Means

7 04 2011

A survey conducted by the Consumer Federation of America found that only 1/3rd of Americans know what their credit score means.  Credit scores are essential in qualifying for a mortgage, car loan, and a bad credit score can even prevent you from being getting a service like internet. 

A credit score tracks how you incur debt and pay your bills.  A high score shows you are responsible and will pay off loans.  High scores not only help you get lower interest rates on credit cards, mortgages, and car loans, but also for renting an apartment, getting a job, getting utilities.  Businesses that may extend you credit, look at your credit report to decide whether to lend to you or not and how much and at what interest rate.

You can find your score for a small fee from Equifax (800)685-1111, Experian (888)397-3742, or Trans Union (800) 916-8800.  If you are applying for a mortgage you can get your score for free from your lender. Annualcreditreport.com will give you access to a free credit report every year from each of the three major credit reporting companies.

Your score will fluctuate whenever you pay a bill on time or late, apply for a new credit card, or take out a loan.  It attempts to predict what your credit behavior will be like in the future. A creditor looks at the information on your credit report and predicts the creditworthiness based on outstanding debt, payment history, late payments, and age of your accounts.  The total number of points received suggests how likely you are to pay back a loan or pay bills on time.

To improve your score you should pay your bills on time, reduce outstanding debt, avoid having a creditor check your report, do not add new balances, stop applying for credit, keep one or two credit cards that you have had the longest and cancel the rest.  If you do this it will take some time to change, but over time your score will go up.

If there is something wrong with your credit report you should dispute it.  The credit reporting agency is required to investigate all disputes. With the increase in identity theft, you want to protect your information from people who may open a credit card or utility using your information that can damage your credit rating.

A score of 760 or above is considered an A grade and will receive the best interest rates. Above 700 is a B, between 600 and 700 is a C, and below 600 is a D or an F and will lead to higher interest rates.  Establishing good credit is important for future purchases you may wish to make.