Do you know what a credit rating is? Also, do you know what your personal credit score is? Most people don’t think they have to worry about it. They do. Even if you never borrow money, you should worry. Let’s say you need to buy a new car, and like most of us, you can’t pay cash for it. You will need a car loan. At some point in your life, you will probably want to buy a house. You will probably need a mortgage! The most important factor the lender considers is your credit history and credit score. This will take into account the interest rate offered to you. You need to understand this important part of your financial life in order to manage it and make it work for you. If you ignore it, it will probably work against you.

A credit score is issued by an agency. The score is a measure of how well you handled your finances. A credit report contains information about where you live, how you pay your bills, and whether you’ve been sued, arrested, or filed for bankruptcy. Consumer reporting agencies across the country sell the information from your report to creditors, insurers, employers, and other businesses who use it to review your applications for credit, insurance, employment, or housing rentals.

There are three main offices. Each company determines its personal score based on a formula developed by the Fair Isaac Corporation. Each agency uses a slightly different term for their score. Equifax calls its score “Beacon”; Experian calls your score “FICO”; and Trans Union calls their sheet music “Empirical”. Since lenders generally do not report account activity to all bureaus, your credit score may vary.

The rating takes into account activity related to revolving and installment credit that is not secured by tangible assets. This includes your credit cards, term loans, business accounts, utilities, lines of credit, etc. Agencies may not use the same scoring system, so even if all the information is exactly the same, the scoring may vary. The scoring system gives you a credit score between 300 and 900, with a higher score indicating lower credit risk. A score of 650 or higher is generally considered good credit by most lenders.

What factors matter?

Payment history – Were payments made on time? – 35%

Amounts Owed: Is the balance due close to the limit? – 30%

Length of credit history: How long have your accounts been open? -fifteen%

Take on more debt – How many new accounts have been opened? – 10%

Types of credit in use – Mortgage, automotive, consumer accounts, revolving and in installments -10%

What is not calculated?

• Your race, color, national origin, sex, age, marital status

• Your salary, occupation, job title, employment information or address

• The interest rate on your charge accounts

• Any items, such as child support, rental agreements, participation in credit counseling

Is your credit score always accurate? No. It is estimated that almost 80% of credit reports contain errors. So if you want to correct these errors, you will need to obtain a copy of your report. Fortunately, the Fair Credit Reporting Act requires each of the national credit reporting agencies (listed above) to provide you with a free copy of your credit report, upon request, once every 12 months.