A credit score is basically a statistical method of assessing your credit worthiness. Credit scores are based on various factors including your credit history, amount of outstanding debt, and the type of credit you use. Negative information such as late payments and bankruptcies is also used to calculate your credit score. Credit scores are used when applicants apply for mortgages, auto loans, credit cards, auto insurance, and homeowners insurance. The rate you receive is directly related to your credit score. The higher the number, the better you look to lenders. People with the highest scores get the lowest interest rates. Consumers' Rights Not long ago, many Americans didn't even know a specific credit score for them even existed because it was a closely guarded secret in the lending industry. In fact, lenders were prohibited from telling borrowers their credit score. This changed though when consumers began finding out about the score and demanding to see it. In an unprecedented move in 2000, online lender e Loan offered to give consumers their scores for free, with information explaining how the score is calculated and how they might improve it. Public outcry on the possibility of people being denied credit based on bad information in credit reports led to several pieces of legislation and a much more open attitude about credit scores. Not only can consumers today buy their score online from any number of sources, but they are now entitled to one free credit report per year. Key Factors of Your Score Just what goes into the score? The model looks at more than 20 factors in 5 different categories. 1. How you pay your bills (35% of score) The most important factor is how you've paid your bills in the past, placing the most emphasis on recent activity. Paying all your bills on time is good. Paying them late on a consistent basis is of course very bad. Having accounts that were sent to collections is worse. Declaring bankruptcy is even worse. 2. Amount of money you owe and the amount of available credit (30% of score) The second most important area is your outstanding debt -- how much money you owe on credit cards, car loans, equity lines, etc. Also considered is the total amount of credit you have available. If you have 10 credit cards that each have $10,000 credit limits, that's $100,000 of available credit. Statistically, people who have a lot of credit available tend to use it, which makes them a less attractive credit risk. Carrying a lot of credit card debt doesn't necessarily mean you'll have a lower credit score as long as you don't max out every card. As a general rule, you don't want to carry a balance of 50% or more of the available credit on each card. People who consistently max out their balances are perceived as riskier. People who never use their credit don't have a track history. People with the highest scores use credit sparingly and keep their balances low. 3. Length of credit history (15% of score) The third factor is the length of your credit history. The longer you've had credit, particularly if it's with the same credit issuers, the more points you get. 4. Mix of credit (10% of score) The best scores will have a mix of both revolving credit such as credit cards, and installment credit, such as mortgages and car loans. Statistically, consumers with a richer variety of experiences are better credit risks. They know how to handle money. 5. New credit applications (10% of score) The final category is your interest in new credit -- how many credit applications you're filling out. Constantly applying for new credit can eventually hurt your score. The scoring model doesn't look at:   • age • race • job • income • education • marital status • if you've been turned down for credit • length of time at your current address • whether you own a home or rent • time on job A lender may consider all these factors when deciding whether to approve a loan application, but they aren't part of how a FICO score is calculated. Credit Scores are Not Perfect The major drawback to credit scoring is that it relies on information in your credit report, which is quite likely to contain errors. That's why it's critical that you check your credit reports annually, or at the very least 3 to 6 months before planning to buy a house or car. This will give you sufficient time to correct any errors before a lender pulls your score.