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Your Credit Score Number

Like most people, you probably do not know your own credit score. In fact, few people understand how a credit score is calculated. However, as many people have learned (often to their dismay), a credit score can have profound consequences for you. Employment opportunities, mortgages, consumer credit, and countless other important aspects of your life depend upon your credit score.

Credit scores-the arcane calculations pored over by everyone from mortgage lenders to auto dealers to decide how much they�re willing to trust you to pay them back-are growing in importance as their use spreads beyond traditional lenders to wireless-service providers, insurance companies, and even employers.

Just this summer, for example State Farm Insurance Cos. Became the latest big insurer to unveil a new pricing system that uses a credit-scoring model to assign risk and set rates for new auto policies. A survey this year by the Society for Human Resource Management found that 19% of employers always to credit checks on job applicants, while 24% sometimes do. Last year, the group found that the number of employers examining the credit histories of potential employees had nearly doubled since 1996.

New uses like these are part of a trend to harness the predictive power of the date behind your credit score.

A person�s score is basically a snapshot of one�s creditworthiness at a particular moment, based on a wide array of data: It wraps in information about loans and credit accounts, along with a tally of who has accessed the report, as well as a list of court documents and other matters, such as bankruptcies, liens or foreclosures. Obviously, a credit score based upon inaccurate documentation or information can have profoundly unfair (and devastating) affects. This makes it all the more important for you to gain access to your score, and to correct any mistakes.

In recent years, credit scores have been increasingly relied upon by corporations in making decisions that are not normally associated with credit. For example, insurance companies have come to rely upon credit scores as factors in deciding whether to grant automobile insurance coverage. Similarly, cellular phone companies use credit do determine the terms of the contracts that they offer to consumers.

The costs of having a bad score add up fast. Scores range from 300 to 850, with 700 or so marking the point below which it can be tougher to get the best price on a loan. For instance, on a typical $150,000, 30-year mortgage, a person with a score of 639 would face annual payments nearly $2,000 higher than someone with a score of 760, according to Fair Isaac, the company that pioneered the standard FICO credit score in the late 1950s.

For consumers, this increases the importance of understanding the tricks for improving your score. It isn�t surprising people are confused by the process. For starters, each of the 165 million credit-using American adults actually has multiple credit scores, not just one, as the scores are calculated individually by the credit-reporting agencies, Equifax, Experian and TransUnion LLC, based on closely guarded algorithms. Thus, scores vary depending on the source. However, the FICO score is the standard calculation used by mortgage lenders.

The most important way to raise a credit score is a no-brainer: Pay bills in full and on time. In fact, your history of making payments accounts for 35% of your overall FICO score.

Missing payments or submitting the minimum due each month will lower scores. This trap snared Tameka Clark in 2001, when she fell behind on credit-card payments and her credit score dropped to 550, pushing her into �subprime� territory where interest rates can exceed 10%.

It�s important to be vigilant on bill paying, because it can take a long time to recover from a slip-up. After four years of sticking to a debt-management plan, Mrs. Clark, a 30-year-old Internet consultant, was able to raise her score to 680. �Now I�m closer to 6% on a 30-year mortgage�, Ms. Clark says.

The second biggest priority for anyone looking to bump up their score is to maintain a low �credit utilization� level. This refers to the balance to-limit ratio on credit accounts, or the percentage of available credit being used for each card. The credit-utilization level falls under a complicated category referred to as �amounts owed�, which comprises 30% of the FICO score.

In plain English, maxing out credit cards will send a score plummeting. In fact, simply using 50% or more of a limit can cause problems. For example, for a consumer who has four credit cards with a $2,000 credit line on each, it isn�t wise to carry a balance of more than $1,000 per card. In other words, it�s usually better to carry smaller balances on several cards than to pile everything onto one card.

The third-most-important strategy, which makes up 15% of the score, is to build up a lengthy credit-using history. This means it�s usually better not to close out all those old cards, as keeping them open adds to the credit record. Moreover, keeping otherwise-dormant accounts active will help lower the balance-to-limit ratio, as the limits are factored into the credit-utilization formula. Time, in this case, is literally money, which gives older adults a built-in advantage over high-school graduates.

The final 20% of the score is divided equally between two categories: new accounts and diversification. Unlike keeping old accounts open, taking out new lines of credit raises red flags because it makes the consumer look riskier. This is why it�s best to avoid those retailers� cards during the holidays. (Unless, of course, a temporary decline in credit score is no big deal.)

Consumers get credit for having a variety of loans, so it�s better to have an assortment, including installment plans like auto loans or mortgages, than just simply credit cards. That seems counter-intuitive-after all, shouldn�t fewer loans make you look better to prospective creditors? The answer, in short, is that creditors feel that consumers well versed in a variety of credit types pose a lower risk.

As credit scores are based on information in credit reports, it�s important to check reports to make sure they�re accurate. Often, credit reports can omit important bill-payment information, and sometimes they contain errors or accounts fraudulently opened by an identity thief.

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