Your credit score, often called a FICO score after the original credit score designer Fair Isaac Company, is a score ranging from 300 to 850, with 850 being best.  Each of the three major credit bureaus (Experian, Trans Union, and Equifax) will calculate a credit score, so you'll have three.  How helpful or harmful could they really be? Credit scores have the ability to determine your whole financial future. From the interest rates on home mortgages to the rate you pay for auto insurance, credit scores have a direct impact on your cost.

Credit scores are the trend of the future. Five years ago they were nearly unheard of, now credit scores are customized for just about every industry. Even Congress has joined the fray. Currently the Senate is debating an amendment to the Fair Credit Reporting Act that will hold lenders more accountable to reporting accuracy.  If passed, the amendment would allow consumers to get a free copy of their credit report and scores each year.

When you apply for a home loan most lenders will run your credit report as well as get your scores from the three major bureaus. Most lenders use the mid score, the middle of the three scores, although some do use the average score. Most lenders consider a score above 620 to be credit worthy and anything above 700 to be excellent. Currently FHA and VA do not have a minimum credit score requirement. Both FNMA and FHLMC have a 620 requirement unless computerized underwriting is used in which case the score is immaterial as long as an approval is received. A common myth perpetuated by many mortgage companies is that the lower your score the higher your interest rate will be. While this may be the case for some types of mortgages (seconds, sub-prime, lines of credit, etc.), for the four main mortgage conduits, FHA, VA, FNMA, FHLMC, this is simply not the case. If your loan is approved under one of these programs your interest rate will be the same regardless if your credit score is 620 or 700.

Your credit score helps a lender to determine the likelihood of a default during the first 90 days of a loan (the most critical time of a mortgage).  As a result, the biggest percentage of your score (35%) is based on your history of on time payments.  Lenders like to see that you pay all of your bills in a timely fashion, rent, utilities, credit cards, often going back 7 years. A late payment two or three years ago isn't as serious as a late payment a month ago and your credit score will reflect this.

Credit utilization makes up 30% of your score. For installment loans this is usually figured as a ratio of your original loan amount to your current loan balance. This can often cause a personas credit score to be lower during the first year of a large loan. For revolving debt, like credit cards, the ratio is the credit limit to the current balance. Revolving debt counts more toward your utilization ratio than installment debt. An area to watch carefully is what your credit card issuer reports as your credit limit. Often the issuer will report your highest balance as your credit limit.  This can skew your utilization ratio by showing a higher ratio. With revolving debt timing is also an issue. Most credit card companies report to the bureaus on the date that appears on your statement. Even if you pay off your card in full each month in all likelihood your credit report will still show a balance because of when the credit card company reports to the bureaus. It is in your best interest to pay your payment a week before the statement date rather than the due date.

15% of your score comes form the length of your credit history. The longer the time you have had with a particular creditor the better. Experts say that it is not necessary to close old or little used cards to score better as “unused credit doesn't hurt you”. However, with identity theft on the rise it might be prudent to close these old and unused cards rather than run the greater risk of credit fraud.

Credit inquiries count for 10% of your score. Too many can be seen as a negative, especially to a mortgage lender. When buying a home a lender uses debt ratios to determine your eligibility. If there are too many inquiries the lender may see this as additional debt and turn down your loan. The one exception to this is if you are shopping for a home or auto loan in which you are offered a 30-day grace period in which inquiries to mortgage or auto lenders wont hurt your score.

The last 10% of your score is derived from managing different kinds of debts: Auto loans, school loans, credit cards all make up the experience you have had in making timely payments. The type of credit cards you have can also be a factor. Cards issued by a bank are treated differently than those finance companies issue. It is wise not to have too many of either.

Keep your credit balance below 50% of your credit limit if at all possible.  Pay off your credit card balance a week before the statement date as this is often the date the creditor reports to the bureaus. If you are struggling financially always pay your biggest bill first. The larger the missed payment the more impact it will have on your score.  Close unused or little used accounts in an attempt to prevent identity theft. Try to avoid requesting unnecessary cards or credit checks as too many will only drag your score down.

Lastly, know your score. Get a copy of your score from all three major bureaus because they will differ. Not all creditors report to the three major bureaus so what shows on one bureaus report may not show on another, and vice versa. In my own experience as a mortgage lender I find that credit reports are not always accurate. By reviewing your report once a year it will be easier to clear up any inaccuracies.

You can get a copy of your credit report and your credit scores from any of the three bureaus. Or you can access www.myfico.com on the internet and receive all three scores. You can reach the bureaus by contacting them as follows (links open in a new page):