Making Cents: Knowing your credit score

If you've ever applied for a mortgage, car loan or most any other type of financing, you're familiar with the importance of having a good credit score. These days, insurers and even potential employers often scrutinize credit scores.

Ranging from 300 to 850, the higher your credit score, the better. But what exactly is a credit score and how is this almighty number determined?

A credit score, which is often referred to as a FICO score, is named for its software creator, the Fair Isaac Corp., and determined from information on credit reports. That payment history data is entered into software that establishes the number lenders use to estimate risk. The higher the score, the less likely a borrower will default on a loan.

There are five determining factors of a credit score. Payment history carries the most weight, followed by the amounts you owe, the length of your credit history, types of credit you use and new credit.

Payment history includes the number of accounts you have paid on time, negative collections and delinquent accounts.

What you owe is broken down as follows: the amount you owe on various accounts; the types of accounts with balances; any revolving credit lines; amounts due on installment loan accounts; and the number of zero balance accounts.

Types of credit may include a mortgage, installment or revolving accounts. A variety of accounts will typically earn you a higher credit score.

A number of factors come under the heading of new credit: The number of accounts you've recently opened, the number of recent credit inquiries and the time elapsed between making an inquiry and opening an account.

Attempting to open too many accounts in a short space of time will bring your credit score down.

The sooner you bring overdue bills up to date, the better. If you foresee a problem maintaining payment schedules, contact your creditor and hammer out a plan. Avoid opening new accounts that you don't need. And don't close unused accounts - that zero balance could help your score.

Be aware of the types of credit you currently use. A mixture of credit cards, installment loans and fixed-payment loans can help increase your credit score - provided you make timely payments.

source : http://www.google.com/news?