Your credit score plays a large part in whether you can buy a house or car. In certain circumstances, it even affects whether you can get a job. But where does the number come from?
The major credit reporting bureaus might report slightly different scores, but all three use a three-digit number to summarize the state of your credit.
Your debts definitely show up on a credit report, but your credit score is a little different. Its job is to give lenders a yes-or-no answer in response to the question, "Will this person pay my money back?"
Fair Isaac and Company worked with the three main credit bureaus to come up with its three-digit score in the 1980s. Each bureau uses a slightly different version of the FICO score with its own name.
Credit scores range from 300 to 850 -- the higher the better. As of March 2008, the average credit score in the United States is 692.
Your total debt and the length of your credit history both play a role in your overall credit score. But the biggest factor is whether you pay your bills on time. Pay bills late, and your score will drop.
Credit reports aren't foolproof. If you contact credit reporting agencies and have bad information removed, you may improve your score. Avoiding credit entirely means you'll have no credit history, which will make it harder to get a loan.
In addition to using your credit score to help decide whether it's a good idea to give you money, lenders use the score to determine your rate. In general, the better the score, the lower the rate -- and the lower your payments.
Some insurance companies use credit scores to help decide if you are a good risk. They don't necessarily use your entire score, though. Bureaus may provide a modified insurance score that uses only part of your credit history. Some states have passed laws banning the use of credit scores for insurance.
It may seem like a good idea to remove the temptation of an unused credit line, but if that line is one of your older forms of credit, your score may go down. Also, your debt-to-credit ratio is important -- having an unused line of credit makes your ratio go down, improving your score.
In general, when someone pulls your credit score, your total score may drop. This is particularly true if there are lots of inquires in a short amount of time. Lots of inquiries may mean that you're desperate for money.