Credit Scoring - What is it?

So, what happened this weekend? Did you find something you could do for free? Post a comment and let me know!

This week and maybe for the next two weeks, I'll explain the basics of credit scoring. Do you know what your credit score is? Do you care? If you don't, you might want to rethink that. Your credit score is a number assigned to your social security number as it pertains to how you have handled your personal credit. This is for credit cards which are considered revolving credit; you have a spending limit but can keep using it as you pay it down. Auto loans are installment credit; you have a set amount of money you borrowed and as you pay it down, you can't keep using the line of credit. Mortgage credit; this is obvious, your house payment for a first mortgage. This is technically installment credit but lenders look at it a little differently. Seconds are considered revolving credit in most cases as they're often equity lines. This's important and I'll explain that later.

With the three kinds of credit, there's three credit bureaus. Experian, Equifax, and Transunion. You have three credit scores and the one that is used is the middle number. If your three scores are 684, 710, and 690, your credit score would 690. Typically, mortgage companies and auto loans are reported to all three bureaus. Credit cards don't necessarily report to all three, so it's possible to get a report from Equifax that shows a lower score than the report from Transunion because a credit card you were late or defaulted on didn't report to Transunion.

Currently, credit scores range in number from 350-850. I've never seen a score below 480, and the highest score I know of is 813. What criteria makes up your credit score? Here's how it breaks out:

35%: Past payment history (paid on time/late, defaults, etc)
30%: Outstanding dept utilization (how much of your credit available to you is used)
15%: History of credit establishment (how long have you had credit available to you
10%: Type of credit being used (revolving, installment, mortgage)
10%: Number of inquiries (how many times in a year someone checks your credit)

So there are the basics. I'll go into how this convoluted system works on Wednesday. There's so many "if this, than that" when it comes to a credit score. If you have a question, feel free to ask and let's see if we can understand this before the system changes! Laughing.