Quezi

The first credit card of photographer Lieu Cheon Fong. CC-BY

If you’ve ever applied for a credit card, a mortgage or any type of loan, you probably know that your credit score is one of the factors used to determine whether you that loan. But what is it, and where does it come from?

In the United States, your credit score is almost always a three-number digit, and the higher the number, the more worthy you are deemed of being given credit. Although there are several types of credit scores, by far the most common score is known as the FICO score, for Fair Isaac and Co. Scores range from 300 to 850, although almost no one has a score at those extremes. Minimum scores needed to get a loan vary from lender to lender (and some lenders don’t use them at all), but traditionally a score of 620 or better is needed to get better loan rates. The FICO score, in turn, is determined using complex mathematical formulas (details are proprietary) based on information at the credit reporting agencies.

There are three major credit reporting agencies (sometimes called bureaus) in the United States, Experian, Equifax and TransUnion. The credit reporting agencies get their information primarily from lenders, retailers, utilities and other entities that consumers make payments to as well as public records on actions such as foreclosures and collection lawsuits. So the bottom line is that if you pay your bills on time and avoid bankruptcies, foreclosures and repossessions, you’ll have a higher credit score. If not, your score will be lower, although long-ago late payments will hurt your score less than recent ones (and, by law, eventually they won’t affect your credit at all).

Under U.S. law, according to the Consumers Union, you are entitled to get your credit report for free if you apply for a home loan and the lender uses credit scores to determine eligibility or rates. Otherwise, while the credit bureaus are required by law to give you, without charge upon request not more than once a year, the information on which your credit score is based, they aren’t required to give you the credit score itself. But all are happy to do so for a fee.

Be careful about some of the ads that say you can find out your credit score for free. Although many of the advertisers are legitimate companies, sometimes there’s a catch involved. For example, you might not get the “free” report unless you sign up for some other service or apply for a credit card. More important than finding out your score is asking the credit bureaus to provide you with the information on which they base your scores. The credit bureaus aren’t infallible, and if the information they have is mistaken, you can have it corrected.

Also be wary of those who claim they can somehow erase a bad credit history overnight. While not perfect, the credit scores are determined objectively, and ultimately your credit score, and thus your ability to get the loan you need, is based on what you do to meet the loan obligations you have.