So what is credit scoring? You have heard of personality profile that dating services use to find the best match between people. Well, credit scoring is a mathematically calculated financial profile lenders use to match applicants with loans. Credit scoring is a way for lenders to determine how much risk is involved in lending money to you and based on that risk they may decide not to lend money to you at all or change the terms of the loans to match the risk.

Who uses credit scoring? Credit scoring has been around forever, that is since 1950s, and it was first used for issuing credit cards and auto loans. Now all sort of creditors including home mortgage lenders use it. But they also consider other factors such as your salary, your employment and your assets.

So what’s in a credit score? Pick a number, any number between 300 and 850. That would probably be someone’s credit score also known as FICO (Fair Isaac & Co.) score. In the eyes of potential creditors, scores closer to 850 indicate more credit worthiness, which in turn comforts these skittish creditors that you are more likely to pay your loan than a person with lower credit score.

The following are interpretations of what various FICO score ranges mean.

* Excellent: Over 750
* Very Good: 720 to 750
* Acceptable: 660 to 720
* Uncertain: 620 to 660
* Risky: less than 620

What impacts my FICO Score? This credit score number is a relative number and as much as possible objective. By relative, I mean that it compares your financial habits with others in similar situation. The first step is gathering information about how you treat money, do you pay your bills on time, how many credit accounts you have, what type, do you have any collection action against an account, how much total debt you have, and a bunch of other data.

Then the objective part kicks in by using mathematical calculation that do not care about how you look, what religion you have, etc. The lenders only want to know how likely you are to pay their money back in a timely manner and without hassling them.

The FICO score calculations consider the following factors:

Your payment history 35% : Do you pay your bills on time? Have you ever been delinquent, or are you consistently late? How about collection notices and bankruptcy? The answer to these questions account for about 35% of your credit score.

Total debt : How much do you owe lenders compared to the total amount you can borrow impacts about 30% of your credit score. If your credit cards are close to being maxed out, it may indicate looming financial problems and a possibility of default and it drops your credit score.

Length of credit history: Approximately 15% of your credit score calculation depends on how long you have had your accounts? Three days, six months, ten years? The longer credit history has a positive impact on your credit score.

Taking on more debt: Are you taking on more new debts? Even applying for too many new cards too quickly may be considered as financial difficulty and impacts your credit score in a negative way. This builds about 10% of your credit score.

Types of credit in use: About 10% of your credit score depends on the type of credit mix you have. High ratio of credit cards and installments loans in relationship to mortgages has a negative impact on your credit score.

Why do I need to check my credit report from each major credit bureau?

Despite normalization of credit scoring system that gives credit scores about the same value at all major credit bureaus, the information reported to these bureaus are not identical. So, one credit bureau may receive information that impacts your credit scoring one way and another credit bureau receives another set of information that impacts your credit scoring in another way.

The good news is that as of September 1, 2005, as an American, you can ask for a free credit report from each of the major nationwide consumer reporting companies once every 12 months.

Four simple tips to improve your credit score:

* Pay your bills on time, especially your mortgage and your installment loans.
* Borrow below your credit limits and do not max out your credit cards.
* Carry two or three credit cards only.
* Don’t apply for several credit cards at one time.

* DISCLAIMER: Vishy Dadsetan, http://MyPersonalFinance.com or My Favorite Shop, Inc. do not endorse any product or company. This article and website do not provide legal, insurance, or other professional services. If expert assistance is required, the services of a competent professional should be sought. Although Vishy Dadsetan has made every effort to ensure the accuracy and completeness of the information contained in this site, he assumes no responsibility for errors, omissions, inaccuracies, or inconsistencies.

© Vishy Dadsetan

The truth is, of you have a bank account and bills, then you have a credit score, and your credit score matters more than you might think. Your credit score may be called many things, including a credit risk rating, a FICO score, a credit rating, a FICO rating, or a credit risk score. All these terms refer to the same thing: the three-digit number that lets lenders get an idea of how likely you are to repay your bills.

1. Understand where credit scores come from.

If you are going to improve your credit score, then logic has it that you must understand what your credit score is and how it works. Without this information, you won’t be able to very effectively improve your score because you won’t understand how the things you do in daily life affect your score.

In general, your credit score is a number that lets lenders know how much of a credit risk you are. The credit score is a number, usually between 300 and 850, that lets lenders know how well you are paying off your debts and how much of a credit risk you are.

Similarly, credit bureaus and lenders often look at general patterns. Since people with too many debts tend not to have great rates of repayment, your credit score may suffer if you have too many debts.

2. Pay your bills on time.

One of the best ways to improve your credit score is simply to pay your bills on time. This is absurdly simple but it works very well, because nothing shows lenders that you take debts seriously as much as a history of paying promptly. Experts think that up to 35% of your credit score is based on your paying of bills on time, so this simple step is one of the easiest ways to boost your credit score.

3. Avoid excessive credit.

If you have many lines of credit or several huge debts, you make a worse credit risk because you are close to “overextending your credit.” This simply means that you may be taking on more credit than you can comfortably pay off. Even if you are making payments regularly now on existing bills, lenders know that you will have a harder time paying off your bills if your debt load grows too much.

The higher your debts the greater your monthly debt payments and so the higher the risk that you will eventually be able to repay your debts. In order to have a great credit score, avoid taking out excessive credit. You should stick to one or two credit cards and one or two other major debts (car loan, mortgage) in order to have the best credit rating.

4. Pay down Your Debts.

If you have a lot of debt, your credit score will suffer. Paying down your debts to a minimum will help elevate your credit score. If you are serious about improving your credit score, then start with the largest debt you have and start paying it down so that you are using a less large percentage of your credit total.

In general, try to make sure that you use no more than 50% of your credit. If possible, reduce the debt even more. If you can pay off your credit card in full each month; that is even better. What counts here is what percentage of your total credit limit you are using – the lower the better.

5. Have a range of credit types.

The types of credit you have are a factor in calculating your credit score. In general, lenders like to see that you are able to handle a range of credit types well. Having some form of personal credit – such as credit cards – and some larger types of credit – such as a mortgage or auto loan – and paying them off regularly is better than having only one type of credit.

6. Beware of debts and credit you don’t use.

Having credit lines and credit cards you don’t need makes you seem like a worse credit risk because you run the risk of “overextending” your credit. Also, having lots of accounts you don’t use increases the odds that you will forget about an old account and stop making payments on it – resulting in a lowered credit score. Having fewer accounts will make it easier for you to keep track of your debts and will increase the chances of you having a good credit score.

7. Check your credit score regularly

You are more likely to notice problems and inconsistencies if you check your credit score on a regular basis – at least once a year and preferably three times a year. Be sure to check your credit rating with each credit bureau, too. If you notice anything odd or anything you don’t recognize (such as a charge account you did not open) report it immediately.

Sometimes, these errors are caused by mistakes made at the credit bureau, but they could be an indication that someone is using your identity. In either case, such mistakes could hurt your credit score. Fixing such errors improves your credit score.

Tip #1 Understand where credit scores come from.

If you are going to improve your credit score, then logic has it that you must understand what your credit score is and how it works. Without this information, you won’t be able to very effectively improve your score because you won’t understand how the things you do in daily life affect your score.

If you don’t understand how your credit score works, you will also be at the mercy of any company that tries to tell you how you can improve your score – on their terms and at their price.

In general, your credit score is a number that lets lenders know how much of a credit risk you are. The credit score is a number, usually between 300 and 850, that lets lenders know how well you are paying off your debts and how much of a credit risk you are.
In general, the higher your credit score, the better credit risk you make and the more likely you are to be given credit at great rates. Scores in the low 600s and below will often give you trouble in finding credit, while scores of 720 and above will generally give you the best interest rates out there. However, credit scores are a lot like GPAs or SAT scores from college days while they give others a quick snapshot of how you are doing, they are interpreted by people in different ways. Some lenders put more emphasis on credit scores than others.

Tip #2 Keep the contact information for credit bureaus handy.

The three major credit bureaus are important to contact if you are going to be repairing your credit score. The major three credit agencies can help you by sending you your credit report. If you find an error on your credit report, these are also the companies you must contact in order to correct the problem. You can easily contact these organizations by mail, telephone, or through the Internet

Equifax Credit Information Services, Inc Address: P.O. Box 740241
Atlanta, GA 30374
Telephone 1 888 766 0008

TransUnion LLC Consumer Disclosure Center Address: P.O. Box 1000
Chester, PA 19022
Telephone 1 800 888 4213

Experian National Consumer Assistance Center Address: PO Box 2002
Allen, TX 75013
Telephone 1 888 397 3742

You may want to note this information wherever most of your financial information is kept so that you can easily contact the bureaus whenever you need to. Your local yellow pages should also have the contact information of these credit agencies as well.

Tip #3 Develop an action plan for dealing with your credit score.

Once you have your credit report and your credit score, you will be able to tell where you stand and where many of your problems lie. If you have a poor score, try to see in your credit report what could be causing the problem:

Do you have too much debt?
Too many unpaid bills?
Have you recently faced a major financial upset such as a bankruptcy?
Have you simply not had credit long enough to establish good credit?
Have you defaulted on a loan, failed to pay taxes, or recently been reported to a collection agency?

Tip #4 Pay your bills on time.

One of the best ways to improve your credit score is simply to pay your bills on time. This is absurdly simple but it works very well, because nothing shows lenders that you take debts seriously as much as a history of paying promptly. Every lender wants to be paid in full and on time.

If you pay all your bills on time then the odds are good that you will make the payments on a new debt on time, too, and that is certainly something every lender wants to see. Experts think that up to 35% of your credit score is based on your paying of bills on time, so this simple step is one of the easiest ways to boost your credit score.

Tip #5 Avoid excessive credit.

If you have many lines of credit or several huge debts, you make a worse credit risk because you are close to “overextending your credit.” This simply means that you may be taking on more credit than you can comfortably pay off. Even if you are making payments regularly now on existing bills, lenders know that you will have a harder time paying off your bills if your debt load grows too much.

The higher your debts the greater your monthly debt payments and so the higher the risk that you will eventually be able to repay your debts. Plus, statistical studies have shown that those with high debt loads have the hardest time financially when faced with a crisis such as a divorce, unemployment, or sudden illness.

Tip #6 Pay Down Your Debts

If you have a lot of debt, your credit score will suffer. Paying down your debts to a minimum will help elevate your credit score. For example, if you have a $1000 limit on your credit card and you regularly carry a balance of $900, you will be a less attractive credit risk to lenders than someone who has the same credit card but carries a smaller balance of $100 or so. If you are serious about improving your credit score, then start with the largest debt you have and start paying it down so that you are using a less large percentage of your credit total.

In general, try to make sure that you use no more than 50% of your credit. That means that if your credit card has a limit of $5000, make sure that you pay it down to at least $2500 and work at carrying no larger balance. If possible, reduce the debt even more. If you can pay off your credit card in full each month, that is even better. What counts here is what percentage of your total credit limit you are using – the lower the better.

Tip #7 Have a range of credit types.

The types of credit you have are a factor in calculating your credit score. In general, lenders like to see that you are able to handle a range of credit types well. Having some form of personal credit such as credit cards and some larger types of credit such as a mortgage or auto loan and paying them off regularly is better than having only one type of credit.

Tip #8 Look out for identity theft.

Many people who are careful about paying bills on time and having minimal debts are shocked each year to find that they have low credit scores. In many cases, this happens as a result of identity theft. Identity theft is a type of crime in which people take your personal information and steal that information to pose as you in order to get access to your accounts or identity.

For example, someone with your PIN numbers can remove small amounts of money from your bank account each month or someone can use your name and personal information to get credit cards in your name and use those credit cards with no intention of paying back the money. You are stuck with the large debts and the poor credit score.

To prevent identity theft, always check your account statements carefully each month. Report any suspicious activity or any charges you don’t recognize at once. Also check your credit report regularly and immediately investigate any new credit accounts you do not recognize – this is the best way of detecting and acting on identity theft.