What's in a Credit Score?

You've heard the term plenty of times, but what exactly is a credit score and why is it so important? Your credit score represents an analysis of your credit history, and represents how credit-worthy you are. Lenders use the score to determine how much of a risk you represent, and to determine if you qualify for a loan.

Five Credit Score Elements
There are five basic elements that are taken into account to calculate your credit score:

Payment history. Make sure you're paying your bills on time. If you've missed payments in the past, do your best to get current.
Amounts owed. Keep your outstanding debt as low as you can. Remember, it's better to pay off debt than to move it around.
Length of credit history. The longer you can show a responsible credit history, the better it is for your credit score. If you've just started out, try not to open too many credit accounts too quickly.
New credit. Credit bureaus distinguish between a search for a single loan and a search for too many new credit accounts. So, if you're shopping for credit, make sure you do it within a particular amount of time. The golden rule for new credit? Get it only if you need it.
Types of credit used. From credit cards and retail accounts to installment loans and mortgages, we use different types of credit. It doesn't really matter what types of credit you have in your report, what's important is that you're managing them responsibly.

Thanks to a 2005 law, consumers can access one free credit report a year from each of the nation's top consumer credit reporting companies, Equifax, Experian, and TransUnion. These agencies track your credit history and award you a score based on whether or not you pay bills on time. The better your score, the more likely you can borrow at lower rates, reduce insurance premiums and even cut utility bills.

A Poor Score Can Cost You
Prospective employers, landlords, insurance underwriters, as well as others who grant credit, may all acquire your credit report. That's why it's so important for you to check your report at least once a year. Even if you pay every bill on time, mistakes can happen. According to the Public Interest Research Group¹, With up to 70 percent of credit reports containing errors ranging from mistaken identities to multiple listings of the same loan, it is up to you to keep on top of your credit history.

Industry experts recommend you review your credit report at least once a year to check for mistakes or misrepresentations that could potentially ruin your credit rating. By checking your credit report regularly you can also spot any attempts at identity theft, and monitor your debt management.

Talk to your kids about credit
If you haven't discussed credit and credit cards with your children, now is the time. Web sites such as handsonbanking.com offer age appropriate tools to explain the complexities of credit to all age groups, from young children up to teens getting ready for college. It's never too soon to teach them to understand finances and to plan for their future.