The basics of a credit score

FICO Score

Credit scores are important, and can be improved. Image: Flickr / pyxopatamus / CC-BY-SA

A credit score is a number intended to indicate how risky a financial gamble a person may be. There are three big credit reporting agencies in the United States, and each one reports its own score. There are numerous factors that affect your credit score, and you can control your credit score by taking specific actions.

The history of credit scores

Credit score reporting, in its current form, has been around since 1841. Store owner Lewis Tappan started keeping files on customers and their payment history. Tappan hired thousands of correspondents to report on the credit worthiness of individuals in their communities. These reports on individuals soon had hundreds of customers, and the modern credit reporting system was born.

How credit scores are used

Credit scores were originally intended for informing decisions about extending credit to customers. Credit scores are used much more extensively now. Many lenders check credit reports on individuals applying for a credit card or loan. Landlords, potential employers and insurers may run credit reports in order to inform their decisions. There is controversy over the use of credit scores to make decisions that do not deal directly with the issuing of credit or providing of financial services, but the practice is legal and widespread.

What goes into a credit score

Each of the three credit reporting agencies has a different formula for creating a single credit score. The FICO score, developed by the Fair Isaac Corporation, is the most widely used measure of credit in the United States. The general information included in these reports has been determined to be:

  • 35 percent payment history – how often you make payments on time
  • 30 percent debt – what type of debt and how much debt you have
  • 15 percent length of credit history – how long you have used credit
  • 10 percent credit diversity – how many different types of credit you make use of
  • 10 percent hard inquires – when a creditor checks your credit report

Defining good credit

The FICO credit score ranges from 300 to 850. What is considered a good credit score depends on the creditor doing the checking. However, the relative risk factor associated with each score can be estimated. In general:

  • A FICO score of 770 to 850 is considered “choice”
  • A FICO score of 710 to 770 is considered “good”
  • A FICO score of 600 to 710 is “average” or “medium” credit
  • A FICO score below 600 is considered “bad” credit or “high risk”

Taking control of your credit score

The federal government mandates that every credit reporting agency provide a free copy of its credit report on an individual once a year. These free federal reports generally do not include the numerical credit score, but they do include all the information on your report. The government-supported provides access to these free reports. There are also numerous services that provide a “free” copy of a credit report in exchange for subscription to services. Once you have a copy of your credit report, check it for accuracy. Credit report errors must be disputed in writing, with a copy of any relevant documents included. The agency has 30 days to investigate the dispute and inform you of the outcome.

Improving your credit score

Once you determine the information on your credit report is accurate, you can improve your credit score by taking a few simple steps. First, pay your bills on time. Second, take a close look at the debt you are carrying and how it is being used. If your credit card balances are close to their limit, pay down that debt. You should also try to keep your debt to income ratio – the ratio that compares your total monthly debt payments to your total monthly income – below 30 percent. For an income of $2,000 per month, a 30 percent debt-to-income ratio is $600. Rebuilding your credit really is simple – make payments on what you owe on time and in full. Once you are doing that, it simply takes time.


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