Take the First Step Needed to Fix Credit History: Understand Credit Scores

To win the credit game, you have to master the basics. So just what is a credit score? In short, a credit score is a measure of risk used to assess an individual's credit worthiness.

Credit agencies generate these scores using statistical models that weigh several factors in a person's credit record, like bill-paying history, the number and type of accounts, late payments, collection actions, outstanding debt, and the age of accounts.

A credit scoring system awards points for each of those pre-determined, standardized factors. A total number of points make up a credit score, which helps the agency automatically predict how likely it is that an individual will repay a loan and make the payments on time. The higher your score, the smaller the risk for the lender-meaning better rates for you in things like loan and mortgage requests.

Credit and Repair 101: Credit Score Report Card

Today, the most common credit score used is the FICO score, or one that uses the Fair Isaac formula to determine the score between 300-850. This is the type of credit score most lenders use to determine your credit risk, making it the most important factor in determining what rate you will pay when you borrow money.

Though Fair Isaac does not reveal the details of their formula, it is largely based on five factors; Payment History, Amount Owed, Length of Credit History, Recent Inquiries, and Types of Credit in use.

Each of the three credit bureaus calculates their own FICO score and makes those scores available to lenders and creditors that want to understand the possible risks of lending money, extending credit, or even waiving a deposit.

Wondering why you have to bother with all three credit bureaus for just one FICO score? Unfortunately it's not that simple. The credit bureaus list FICO credit scores under different names, as shown in the chart below. It is important to monitor your score at all three agencies, because each one uses a different model to collect data and convert it to a credit score.

The bureaus also sell other types of credit scores. You can get a general picture of your credit status from any of the credit score. Do keep in mind, though, that these scores will differ from your FICO scores and from each other.

No matter which credit report you're looking at, though, one thing holds true: the higher the score, the lower your rates will become.

Ready to take action? Download our comprehensive Credit Repair system now to learn how to increase your credit score at all the agencies in as few as 30-45 days.