Recommended Credit Score

by A. Elizabeth Freeman, Demand Media
    Your credit score determines the offer you receive on a car loan.

    Your credit score determines the offer you receive on a car loan.

    Your credit score plays a critical role when you apply for a loan. Lower scores typically result in less-than-desirable loan terms, such as higher interest rates. A score above 760 typically results in the best interest rates, according to MyFICO.com. A score between 700 and 759 provides good interest rates but not as low as for scores above 760. Interest rates are highest for scores that are less than 620.

    Credit Score Components

    The Fair Isaac Corporation, commonly referred to as FICO, provides the formula used by some credit bureaus to determine your score. Five different categories are used to figure out the score, and each category has a different weight. For example, your payment history makes up 35 percent of your score. Payment history includes items you have missed or made late payments on as well as items you pay per your credit agreement. Other components of the score include amount owed (30 percent), length of history (15 percent), types of credit (10 percent) and new credit (10 percent).

    Credit Reporting Agencies

    There are three credit reporting agencies: TransUnion, Experian and Equifax. These agencies use your credit history and information to compute your score. Each agency should have the same information, but often, people find that their credit score varies from agency to agency. One reason for the discrepancy is that the agencies do not use the same formula to calculate the scores, even though they are working from the same information. For example, TransUnion uses its own formula to report scores to consumers, while Equifax reports the FICO score to consumers. The FICO score is the one that is used by lenders to determine loan terms.

    Raising and Lowering Your Score

    A credit score is not a fixed number; it can fluctuate considerably based on your activity. One way to make a score drop is to open several different credit accounts within a short time span. The impact of credit inquiries and new accounts varies based on your credit history and other factors, according to MyFICO.com. One inquiry typically makes your score drop by about five points. If you open four new credit cards within a month, your score can drop by around 20 points. Another way to make a score drop is to care a high balance on a revolving credit line, such as a credit card. Having a high balance makes you seem more risky to lenders. You can improve your score by paying off high balances, keeping them low in the future and by not opening several new accounts at once.

    Finding Your Score

    You can request your score through several companies online. MyFICO.com allows you to purchase your score, as do the three credit bureaus. You also have the option of purchasing your score after you check your credit report. According to the Fair Credit Reporting Act, you have the opportunity to review your report for free each year, through AnnualCreditReport.com. The free report does not include a free credit score, however. AnnualCreditReport.com is the only website that lets you get a free report. Other sites claim to provide you with a free score or free report, but usually with a catch. For example, you might get a free 14-day trial, then have to pay a monthly fee after that.

    About the Author

    Based in Pennsylvania, A. Elizabeth Freeman has been writing professionally since 2007, when she started writing theater reviews for OffOffOnline.com and Theater Talk's New Theater Corps blog. Since then, she has written for Phillyist, TheNest, ModernMom and "Rhode Island Home and Design" magazine, among others. Freeman has an Master of Fine Arts in dramaturgy/theater criticism from CUNY/Brooklyn College.

    Photo Credits

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