Your credit score is basically your credit history expressed numerically. Its a grade of how well you have used your credit. Every 12 months it is usually worthwhile to pay a little extra and check your credit score.
There are different methods of calculating credit scores. The most widely used type of credit score is a credit score that is called the FICO score, which is developed by the Fair Isaac Corporation. This is also the reason why people will sometimes refer to your credit score as your FICO score (or even FICA score, which is incorrect).
FICO Scores are calculated from the following information in your credit report (listed in order of importance):
- Payment History:
- Number of accounts (credit cards, mortgages, etc.) paid on time
- Number of past due accounts
- Presence of adverse public records (bankruptcy, judgments, suits, liens, etc.), collection items, delinquent accounts and recency of these items
- # of days past due on delinquent accounts
- $ Amount past due on delinquent accounts or collection item
- $ Amount of Debt
- Number of accounts with balances
- Proportion of balance to available credit lines (e.g. what percentage of the credit line on your credit card are you using–the lower the better)
- Proportion of balance to original loan amount on loans (e.g. how much of your mortgage have you paid down–the lower the better)
- Length of Credit History
- New Credit:
- Number of recently opened accounts, and proportion of accounts that are recently opened
- Time since recent account opening(s), by type of account
- Number of recent credit inquiries (e.g. applying for a credit card is considered a credit inquiry)
- Time since last credit inqui
- What type of credit do you use:
- Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)
Your credit score lets you understand how your credit compares with everyone else — is it average, exceptional, etc.
Staying on top of your credit score is very important. Your credit score affects your mortgage rate, the credit-card offers that you receive, the premium that you pay on your car insurance, and more.
Bottom line: People with high credit scores pay less for most loans and insurance products than people with low credit scores. This table illustrates just how important it is to have a good credit score when you apply for a mortgage:
EXAMPLE: 30 Yr Fixed Mortgage — $250,000 Loan Amount
| Credit Score / FICO® score | Mortgage Rate | Monthly Payment | Annual Difference relative to the best Credit Score |
| 760-850 | 5.69% | $1,450 | N/A |
| 700-759 | 5.92% | $1,485 | $420 |
| 660-699 | 6.20% | $1,351 | $972 |
| 620-659 | 7.01% | $1,665 | $2,580 |
| 580-619 | 9.31% | $2,068 | $7,416 |
| 500-579 | 10.28% | $2,245 | $9,540 |
Above Mortgage Rates are representative of the actual market rates on April 30, 2008.
