A Simple Guide to Credit Scores

A better credit score means a better deal from landlords, lenders, insurers and other creditors. How much you pay for credit, where you live and where you work depends largely on that three-digit number.

Banks and credit card companies review your score when deciding whether to extend you credit and how much interest to charge.

A high score can lead to lower car- and home-insurance premiums, a deposit waiver from utility companies and a better service package from the cell-phone company.
Many landlords check credit scores before allowing you to sign a lease.

Many employers - 35% in 2003 - are doing credit checks on prospective employees, particularly those who would deal with money.
Find out where you stand and take steps to raise your score if it's below 700, particularly before you apply for a mortgage or other loan. A score below 620 flags you as a credit risk and may destine you for credit denial or subprime interest rates.

What is a credit score?

The three major credit-reporting agencies -- Equifax, Experian and TransUnion -- use software developed by Fair Isaac Corp. to rate your risk for assuming debt based on your credit history. The result is commonly known as a FICO score.

The score is based on factors including payment history, the amounts you owe and the types of credit you've obtained. Scores range from 300 to 850 and each credit bureau may assign you a different result based on the information it receives from creditors.

While there is usually a fee to obtain your credit score, you are legally entitled to ONE FREE CREDIT REPORT EACH YEAR from each of the three credit reporting agencies, available at AnnualCreditreport.com.  Asking for your personal report won't hurt your score, nor will requests made by credit card companies that offer preapproved cards, or requests by prospective employers. Multiple checks made when you're shopping for a mortgage will count as only one.

The No. 1 way to raise your credit score

Payment history constitutes 35% of your credit score. Pay all obligations on time (including library fines and parking tickets). One late payment reported to a credit bureau can drop your score by 100 points, particularly if you had a high score.  Late payments can linger on your credit report for seven years, and bankruptcies for 10 years. Consulting a credit counseling service to manage excessive debt will not damage your credit score.

Additional ways to improve and maintain your credit score include:

Limit credit card applications: A credit inquiry can deduct five points from your credit score.

Don’t apply for credit cards from companies that don't set a spending limit or won't report your limit to the credit bureaus.

Don't cancel multiple credit cards when you pay them down. Keep old accounts open to ensure a long credit history.

Limit the percentage of the available credit you use to no more than 30% of the total.

Obtain a secured credit card and managing it responsibly if you have no credit history.

Contributing Source: MSN Money

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