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When it comes time to finance the big things in life such as buying a home or a new car, a loan is almost always necessary. Your credit score will have an enormous influence in determining if a lender decides to advance a loan or turn you down flat.

But first, let me explain again what a credit score is. A credit score is a three digit number that summarizes how well a person has handled debt. You can think about a credit score as your GPA, but instead of giving a history of your school performance, the credit score provides a history of your borrowing performance.

Despite the importance of credit score rating, many people never bother to check their credit scores. What’s more, many people incorrectly believe that age and income influence the number, when only credit history matters.

There are a variety of credit scores; the most common credit score in the US is known as the FICO score.

So, how is your credit score calculated?

Fair, Isaac & Company compiles the information in the credit reports and calculates a score to determine your creditworthiness, using their own secret formula. The credit scores range from 300 to 850, with 850 being the highest, and if you can get it – it is an excellent credit score.

These scores are known as your credit rating. The majority of consumer credit companies and mortgage lenders in the US use the FICO scores. You can visit www.myfico.com to get your FICO score. Sometimes those scores will be provided on the credit report.

The closer your score is to 850, the less risky you appear to the creditors, and the more money you will save on consumer loans and mortgages. Ideally, you want it to be over 750 in these tough economic times. Banks offer better interest rates and payment terms to consumers with higher scores. The lower your credit score, the higher interest rates you will be charged on a loan.

The difference between a high score and low score can mean thousands of dollars in a year’s payments. The score also determines whether you will even be offered a loan.

So, where does the information that goes into your credit score come from?

It comes from three credit agencies – Equifax, Experian, and TransUnion. These are the companies that basically maintain a record of your credit history.

FICO scores are calculated according to the following information:

credit score range

Your credit score ranking is calculated based on:

35% – Credit Payment history. Whether you pay your bills on time or late, whether you have a bankruptcy or bill in collection.
30% – Total debt-to-credit ratio. Your debt to credit ratio is taken into account. If it’s too high, the score is lower.
15% – Length of your credit history. If your accounts are all very new, it’s a minus.
10% – New requests for credit. If you have filed many new applications for credit, your score will go down.
10% – Types of Accounts you have. If you borrow from finance companies or pay day advance companies, the score goes down.

Read more about credit score ranges on this blog.