Credit Score Insight: What You Need to Know

Your credit score is often the difference between an approval and denial when applying for a mortgage, auto loan, or credit card. To be ready when financial opportunities come your way, it’s important to know and actively manage your credit score.

What is a credit score? How is it determined?

Your credit score indicates to potential lenders whether or not you are a good credit risk. It’s calculated using a formula that takes into account your payment history, amount of debt, and other factors. There are multiple credit-score models; the most popular is from FICO, which generates a three-digit number between 300 and 850.

Your score is based on information in your credit report, which is tracked by the three major credit bureaus — Experian, Equifax, and TransUnion. The credit report includes your identifying information, credit history, and credit inquiries. Credit bureaus must provide you with a free copy of your credit report once per year; you can request a copy at AnnualCreditReport.com.

While your credit report shows your financial history with creditors, it doesn’t include your credit score. You can purchase your score separately from myFICO.com or a credit bureau. Check with your credit card company to see if they provide credit scores on your monthly statement. But beware of websites that offer “free” credit scores—they may have hidden fees or require you to sign you up for services you don’t need.

How can I find ways to improve my credit score?

If your credit score seems low, check your credit report for incorrect information. Look for accounts you haven’t opened, payments the report says you’ve missed (but haven’t), and other errors. If you find errors, write the credit bureau and include the disputed information, along with copies of supporting documents. (The Federal Trade Commission has a sample dispute letter and more details on how to correct errors.)

If your report is accurate but your score is lower than you would like, learn how your score is calculated. Check Experian, Equifax, and TransUnion’s websites to learn more about factors that may affect your score. In addition, you may be able to improve your credit score by not opening  new credit card accounts, making payments on time, and increasing your available credit to debt ratio.

Yes, it takes some time and effort. But being able to drive away in a new car or purchasing your dream house in the future makes every minute spent managing your credit score worth it.