What Does Your Credit Score Mean?

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Maintaing a low credit utilization percentage gives a tremendous boost to your credit score.
Maintaing a low credit utilization percentage gives a tremendous boost to your credit score. (Image: Jupiterimages/Polka Dot/Getty Images)

A credit score is a computation that indicates your credit worthiness as a borrower. A number of criteria go into calculating a credit score. Lenders typically use your credit score and credit history when deciding whether to offer you a loan. Your score also impacts the interest rate and terms you receive.

FICO and Credit Bureaus

The most pervasive credit scoring system is FICO, named for the Fair Isaac Corporation, which developed the first credit score and the early 21st-century FICO system. Lenders use one or all of the credit scores generated for you by three major credit reporting bureaus—Equifax, Experian and TransUnion. The Equifax BEACON score, Experian/Fair Isaac Risk Mode and TransUnion EMPIRICA score are all derived from the FICO score system.

FICO Scoring

Not surprisingly, consumers are often unaware of the many specific items included in their FICO score calculation. However, MyFICO indicates that your credit score calculation is generally broken into five categories. These include your payment history, amounts owed, length of credit history, new credit and types of credit used. Each category includes several scoring components each carrying varying influences on your score that are sometimes dependent on your particular traits as a borrower.

Score Interpretation

Many consumers have a general idea of what their credit score means. However, understanding your score's specific interpretation from a lender's perspective is another story. FICO scores range from a low of 300 to a maximum score of 850. A score in the 700s is generally good. Anything over 775 is regarded as excellent and puts you in optimum borrowing position. Scores well below 700 may lead to higher rates or less favorable credit terms.

Affecting Your Score

Keeping track of each specific item that impacts your credit score is too much for most consumers. However, understanding some key principles of good borrowing can help you get your best possible FICO score. Making on-time payments is a very critical scoring component. So is credit utilization. This is the amount of available credit that you are actually using. You should maintain a credit utilization number as close to 0 percent as possible. More practically, he indicates that lenders typically like to use 25 to 35 percent available credit use as a maximum, according to Bankrate.com. Exceeding 50 percent utilization spells trouble.

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