Your credit score is an important part of your credit report.  Lenders place a lot of importance on your credit score when determining whether or not they feel you are credit worthy.  The credit score was developed by Fair Isaac Corporation and is referred to as a FICO score.  The scores range from 300 to 850 and are calculated using a mathematical equation based on information found in your credit report.  The higher your score, the better. According to the Fair Isaac Corporation website, the median FICO score is 723.

Lenders also use your credit score to determine the rate they will offer you on a loan.  For instance, if you are applying for a mortgage, a higher score will result in a smaller rate which will reduce your monthly payment as well as reduce the overall cost of your loan.

Since the information contained in your report varies between the three major credit reporting agencies, your credit score will vary as well.  This happens because the information supplied to the agencies is not always identical.  For this reason, it is important to request a copy of your report from each of the reporting agencies.

The FICO score is calculated by using five major categories:

1.      Types of credit in use – 10%

2.      New credit – 10%

3.      Length of credit history – 15%

4.      Amounts owed – 30%

5.      Payment history – 35%

Fortunately, there are things you can do to improve your credit score.

• Only apply for new credit as needed.   While it is generally better to have a variety of credit (i.e. credit cards, installments loans, mortgage loans, etc.), it can be detrimental to have too many accounts open.
• Make your payments on time.   The longer your history of paying on time, the better.
• If you have had problems in the past with your credit you will need to make a concentrated effort to reestablish your credit history.  If this is the case, open new accounts and make payments on time in order to establish a good payment history.
• Request a copy of your credit report and read it carefully to determine whether or not there are any errors on the report.  You are entitled to one free copy of your credit report annually from each of the major credit reporting agencies.  If you see an error, report it immediately to the credit reporting agency.  They will investigate the error and make the needed corrections to your credit report.
• Do not carry a large amount of debt. 
• Closing accounts will not necessarily improve your score.  In fact, it may actually hurt your score to close accounts that have balances.  If you do decide to close accounts, close the newest accounts first and keep the older accounts open since length of credit history is part of the score calculation.