What is Your Credit Score?

With the economic slump all over the world right now, you're probably seeing a lot of commercials on TV advertising free credit reports, complete with projections of a good credit score. But all of these advertisements can be confusing if you don't know what in the world they're talking about. Let me alleviate some of the confusion:

A credit score is simply a three-digit number that expresses how likely you are to pay your bills. It's based on a mathematical formula, called an algorithm, based on information from your credit report and compared to millions of other people all over the developed world. Though it doesn't seem like much, this little number determines interest rates in any number of things you might encounter throughout your life: a car, a house, a credit card, insurance...pretty much anything you can have interest on. The higher your credit score, the lower the interest you pay, because they're expecting that you'll pay your bills in a timely manner.

There are three major credit bureaus in the United States today: Equifax, Experian, and TransUnion. There are several different scoring methods, but one of the most popular scoring methods is the FICO score. Right now, each credit bureau uses its own version of FICO: BEACON, Experian/Fair Isaac Risk Model, and EMPIRICA, respectively. Though they are all fairly the same, they use different algorithms, so they usually vary.

The credit score runs from 300 to 850. Most people have scores anywhere between 600 and 800. 720 is the point where the consumer gets the most favorable interest rates, especially on mortgages. In America, 27 percent of people have a credit score between 750 and 799. This is the highest percentile in the credit score breakdown.