Understanding Credit Scores Isn't That Hard

Online, October 13, 2011 (Newswire.com) - Prior to making a big purchase, such as buying a house, you should obtain and understand your credit score. You should also make sure to understand how your score plays an important role in the process of obtaining a loan.

Simply put, your credit score is a number that lenders use to determine risk - specifically, they use it to decide not just if to loan you the money you seek, but also to determine whether you will repay the loan. A high credit score means you are less of a risk, while a lower score reflects the opposite.

Credit scores are determined by taking data from your credit reports and, after running it through some software, getting a number. You should be aware that there will likely be variances in your scores for each credit bureau, since they all have their own criteria in determining your scores.

Your credit score is made up as follows: 35 percent payment history, 30 percent debt you owe, 15 percent length of your credit history, 10 percent types of credit used, and 10 percent new credit.

To break this down even further, your payment history includes the number of accounts you've paid to terms, negative public records or collections, and delinquent accounts. The debt you owe includes how much you owe on accounts, how much of your revolving lines of credit you've used, amounts you own on installment loans versus original balances, and the number of zero balance accounts.

Your length of credit history is precisely that: the length of time you've had credit. This includes the length of time since each account was opened, and the time that has passed since the last activity on the account.

As for types of credit, this means the mixture of different types of accounts you have - a mix is best. Creditors will look at this to determine if you can handle various types of debt; if you only have one type, it's a red flag.

Last of all, your new credit includes the number of accounts you've recently opened, and the proportion of new accounts to total accounts. Creditors look at this to determine if you've overextended yourself. Too many recent credit inquiries is a huge red flag.

Everyone wants to have a good credit score. But what's good. Scores usually range from 340 to 850. The higher your score, the less risk a lender sees. You'll also get better rates and terms with a higher credit score.

A score over 700 is considered good, but if your score is lower, it doesn't mean you're stuck and you won't be able to establish better credit. It just means it may be a bit more difficult.