Credit score

Your credit score is an evaluation of the information in your credit report which estimates the probability that you will become delinquent on a new credit application. A lender will decide whether to offer you a loan based on credit score, as well as other information such as your income, type of loan, and collateral.

Criteria for scoring
The score is based on items in your credit report which predict future delinquencies; the exact criteria and weights vary by provider. The following weights are used in the FICO score, one of the most commonly used scoring models.


 * Payment history (late payments, collections, public record items such as judgments): 35%
 * Amounts owed (including the ratio of the amount owed to the limits on credit cards, or to the original balance for an installment loan): 30%
 * Length of credit history (age of oldest, newest, and average accounts): 15%
 * New credit (new accounts and inquiries): 10%
 * Types of credit in use (revolving or installment, number of each): 10%

These weights are averages; the actual relevance of each factor depends on the rest of your report. In addition, lenders use variations of the scores depending on the type of credit, as the factors which predict delinquency for credit cards, installment loans, and mortgages may be slightly different.

The score is based on the information in your report at the time it was last reported by the creditor. Therefore, if you had a balance on a credit card and paid it in full by the due date, the balance owed on the statement date will be reported even though the current balance may be zero. This also explains why you may have a different score at the different credit bureaus; not all creditors report to all of the bureaus, and even when they do, the last report date may be different.

Maintaining and improving your score
The criteria for scoring indicate how to maintain a good score. Most important, of course, is to make payments on time; setting up a reminder, or an automatic payment from your checking account, ensures that payments will be made. If you have delinquencies, there is nothing you can do to improve this part of your report except for continuing to make payments on time; older delinquencies are less important, and delinquencies more than seven years old are no loner reported.

Similarly, you need to limit the ratio of balance owed to credit limit on your credit cards. If you are about to apply for credit, ensure that you do not have a large balance on any card in the previous month; paying off the balance in full will not help if the new balance has not yet been reported. If you are carrying a large balance, paying it down is both an excellent investment and good for your credit score in case you need to apply for credit later.

The length of your credit history includes both open and closed accounts. Opening new accounts does decrease your score slightly, both because it reduces the average age of accounts and because new accounts themselves represent an increased risk.

However, closing an old account will not reduce your score directly unless it significantly increases the ratio of balances to credit limits. And this makes sense; if you paid a credit card on time six years ago, that is just as relevant to your credit whether that particular card is currently open or closed. (An account with no delinquencies which has not been active for ten years will disappear from your report; therefore, it may slightly decrease your score ten years after you close it, as the payment record and age of accounts will no longer count it.)

Inquiries are counted for only twelve months, and scoring models recognize when multiple inquiries are not the result of multiple attempts to open accounts. Multiple auto, student, or home loan inquiries within a short time are counted as only one inquiry because you are probably shopping for rates rather than buying multiple cards, college funds, or homes.

Checking your score
When you check your credit report (for example, the free annual report from http://www.annualcreditreport.com), or a paid report directly from the bureau, you will usually be given the option to purchase a credit score at the same time.

There are also commercial services which will give you a credit score. Most such services advertise a "free" report, but the report is only free with enrollment in a credit monitoring service. Another commercial service, which is actually free, is Credit Karma; this service gives a summary of your report and your credit and insurance scores, and is supported by advertising rather than by subscription fees.

A lender may give you your score as part of the loan process, but it is usually too late for you to do anything with the score unless there is an error on the credit report.

Checking your own credit report and score does not count as an inquiry for scoring purposes, and is not disclosed to lenders.

What should appear in a score report
A score report should give your numerical score, and an indication of how that score compares to other credit reports. The percentile is what is important

It should also give the primary reasons that the score is not higher. Note that these reasons are written as reasons for denial of credit; "Ratio of amount owed on revolving accounts to credit limits is too high" could mean that you were denied credit because you have maxed out your credit cards, or it could mean that you have excellent credit and one reason it is not perfect is that you owe 15% of the credit limit on your cards and it would be better if you owed 5%.

Importance
A credit score is only used when you apply for credit (and, in some states, for insurance). Therefore, your score today is irrelevant if you are not planning to apply for any credit until next year; it doesn't hurt to charge the full limit on a credit card if the balance is paid in full before you need the credit report for any purpose. You should check your report regularly (to check for errors), but need not check your score.

In addition, lenders do not care about differences between very high scores, as they all represent a very low risk. Therefore, if it is clear from your credit report that your credit is excellent (no late payments, several accounts that have been open for years, no card anywhere near the limit, at most one new account), you do not need your score. And if you have an excellent score, you can afford to do things which will benefit you but lower the score, such as opening a new credit card with better benefits, closing a card you no longer want, or charging 25% of the limit on a card.