Do You Really Understand Your Credit Score

When you are told what your credit score is do you really understand what it means, how it is figured, and how this score will impact your financial life? We are going to take a look at and explain the significance of this score as it can impact your life in ways that you might not have even considered. Let's first take a look at what a credit score actually is.

When someone uses the term credit score it is a number that directly represents your credit worthiness according to the standards set by the credit markets. The higher your score on a scale from 300 to 850 the less risk you are to a lender. This means that when they look over your entire credit history you are less likely to default on your loan than someone on the bottom end of the scale.

Each of the three credit bureaus has their own criteria for how they figure you score so your score can vary from each one. However they all look at the same information and here is what determines your score. Your past payment history will account for 35% of your score, how much outstanding debt you are carrying will account for 30%, how long you have established credit will count for 15%, newer credit will weigh in for 10% and the type of credit that you have will account for the last 10%.

What this break down means is that if you have a lot of late payments 35% of your score is going to be hurt by these delinquent payments. If you have credit available and all your accounts are close to being maxed out then this will impact 30% of your score negatively. If you a new to the credit world then you are not going to show a long history of making payments so that will impact your score badly for at least 25% of your credit scoring. You need to have several types of credit lines such as secure, unsecured, fixed accounts and revolving credit to have too many of either type will adversely affect 10% of your score.

What does it mean if you have a low score for your credit? It can impact you in ways you may not have even considered. For example your homeowners insurance, some companies have a cut off and if your score is to low they will not write you a policy. Your car insurance rates will also be affected by your score. The lower your score the higher your premiums and your deposit will be. Even your ability to get a cell phone can be damaged by a bad credit rating. The cell phone company may either deny your application or want a very large deposit from you.

As you can see having good credit is a necessity in today's credit driven world. The first step to improving your credit score is to understand what it actually is, how the credit companies figure it and how a low score can adversely affect you.