Your credit score can seem like an arbitrary number that lenders just randomly pick out of a hat. However, there is a little more method to the madness than first meets the eye. The reason you have a credit score is so that you can have quick and easy access to loans. It is kind of like having a GPA. In the same way that colleges look at your GPA to judge your character before accepting you to their school, lenders will look at your credit score to judge your financial character before lending you money.

Your credit score provides lenders with information about your credit history and spending habits. They use this score determine how much risk is involved in lending you money, and how likely or unlikely you are to pay back the money that you have borrowed. Lenders get this information from the three major credit reporting agencies, Equifax, Experian and TransUnion.

 
The three credit reporting agencies draw your credit score from 5 major points of interest:

• Payment history (35%)
• Length of history (15%)
• New Credit (10%)
• Types of Credit Used (10%)
•  Debt (30%)
  
  *Notice that your current income is not factored into your credit score.

The average person has a credit score between 300 and 800. Only 13% of the population has a credit score higher than 800. As mentioned before your credit score gives lenders a general idea about your spending habits.

What does your score mean?  

            300-500: Usually means that you have been consistently late when paying your
            bills, you have several accounts open for collection, and that you may have other
            information on your credit report that suggests you would be an unreliable
            consumer to lend money to. Lenders see all of these factors as justifiable reasons
            for charging you higher interest rates on loans because of the risk involved in
            lending to you.

            600-700: Means that most, but not all of your payments have been made on time. A score of this magnitude
            implies that you are a fairly dependable consumer.

            700 + : When lenders see a score this high they know that the consumer has responsible debt management skills.
            People with scores higher than 700 are the most likely to get fast and easy loans at lower interest rates

 
Clearly, having and maintaining a good credit score is beneficial all across the board, but if you are like most people you may not be sure how to go about improving your credit score. First and foremost you need to pay ALL of your bills ON TIME, EVERY MONTH. A late bill is just like a bad grade, and it can only lower your score. Also, if you can afford it, try to pay more than the minimum amount required on your credit card payments. This will not only improve your credit score, but it will also save you money in the long run because you will pay less in interest payments.

You may also want to watch out for leaving unused accounts open. Many people pay off a loan but do not call the lender to close their account. As long as this account is open it can bring down your credit score.You need to call the lender and close your account before it will be removed from your credit report.

Remember that ever year you can and should get your free credit report from one of the three credit reporting agencies mentioned above. Simply, call and request your credit report so that every year you can see where your credit score stands with lenders, and how you can improve your spending and bill paying habits.
Equifax: (800) 685-1111
Experian: (888) 397-3742
TransUnion: (877) 322-8228