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Your Credit Score Explained: What You Need To Know

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Josh

Baseball coaches won't make a player a designated hitter unless their batting average proves that they're able to hit the home run!  Likewise, banks and credit card companies won't lend money to people unless there's proof that they'll repay the loan.  Lenders look for that proof in your credit score, the "batting average" of your overall credit history. 

What's in your credit score?  It's much more than a number attached to your credit report.  It's an important piece of financial information that lenders look at when deciding whether or not you are a worthy investment.  You need to build the highest credit score possible to prove to banks and credit card companies that you'll repay the money they lend you well.  Credit reports are scored on a scale between 350 and 850, and the closer your score is to a perfect 850, the higher likeliness your loan or credit request has of being approved!   

Most credit scoring systems are calculated from all the different credit data in your credit report. This data is grouped into five categories:

Payment history. How well do you pay your bills on time?

Amount of debt.  Do you owe lots of money on many accounts?

Length of credit history.  How long have you had credit?

Types of credit.  Do you have a healthy mix of credit (credit cards, installment loans, mortgage loans, etc)?

New credit.   Are you taking on too much debt?

A credit score takes all these categories into consideration.  No one piece of information or factor alone will determine your score, just as one hit alone doesn't determine a player's batting average.  Remember that your credit score will change with credit report changes-- if you stop paying a loan, your credit score will go down. Similarly, if you begin paying all of your bills on time, your score will increase, and you'll qualify for a loan that's the equivalent of a home run!

This article was written by Josh at ACCION USA (http://www.accionusa.org). ACCION USA provides business loans up to $25,000 to small business owners who need financing to expand their businesses.