Creditors use credit scores, or risk scores, to indicate a borrower's creditworthiness. Your financial attributes are used in a formula that calculates the likelihood you'll repay your debts. Creditors look at how people with similar information repay their debts, and assess the possibility that any given borrower will default on a loan. The higher the score, the lower the risk for the creditor.

Credit scores, sometimes referred to as FICO scores, are based on statistical models developed by Fair, Isaac and Co., a financial services company founded in 1956. Your credit information is evaluated in the following five areas to determine your credit score:

• Amount of credit
  • Being close to the credit limits on your credit cards lowers your credit score.
  • Having a large amount of debt will lower your credit score.
  • Having an installment loan with most of the balance remaining gives you a lower credit score.
• Length of time using credit
  • New credit users have lower credit scores.
• New credit accounts
  • A significant number of credit inquiries on your credit report may give you a lower credit score, as it shows you've been shopping for credit.
  • An increased number of new credit accounts can lower your credit score.
• Payment history
  • Charge-offs, foreclosures, judgments, and bankruptcies will lower your credit score.
  • Late payments bring down your credit score.
• Types of credit
  • Using secured credit cards or finance companies can lower your credit score.
  • Too many revolving accounts can lower your credit score.

It may sound like credit scores are used to keep you from getting the credit you desire. In reality, there are benefits to the credit scoring system, including:

• Credit scores are based on the same criteria for everyone.
• More credit is available to more people at lower rates.
• Having a low credit score doesn't necessarily mean you'll be turned down, but the offers you receive may include higher interest rates.
• Higher loan amounts are being given out because creditors feel confident that credit scoring can accurately predict default risk.
• Credit scores can allow for faster credit decision.

When you're looking for a new home or car, it's not uncommon to shop around for the best interest rates on a mortgage or auto loan. Doing this can result in many credit inquires on your credit report.

Having multiple credit inquiries as a result of shopping for a mortgage or auto loan is taken into account by credit scoring models when calculating your credit score because:

• Multiple inquiries in a 14-day period count as one inquiry toward your credit score.
• Any inquiries in the last 30 days don't figure into the calculation of your credit score.

These two points apply only to mortgages and auto loans, not to credit cards. It's easy to create a lot of credit inquiries when shopping online for credit. If you provide your Social Security Number to a creditor, chances are your credit report will be pulled, and an inquiry will be placed on it. An increased number of inquiries may result in a lower credit score.

Credit scoring is legal; however, creditors must follow specific guidelines. The Equal Credit Opportunity Act standardizes the credit application process, and requires that creditors base credit decisions on credit data and not on such things as race, age or gender.

If you knew your credit score, you'd be able to see how creditors evaluate you when deciding to grant you credit. So how do you find out what it is? Unfortunately, it's not that easy. While the law guarantees access to your credit report under the Fair Credit Reporting Act, you don't have the right to know your credit score.

It's possible this will soon change. Many consumer groups, lenders, and other financial organizations are advocating the need for credit score disclosure. In fact, it wasn't until June, 2000 that Fair, Isaac published information on the statistical model it uses to determine credit scores. This information included approximately how much of your score is based on each of the five categories outlined above. Specifically:

• Amount of credit - 30%
• Length of time using credit - 15%
• New credit accounts - 10%
• Payment history - 35%
• Types of credit - 10%

Knowing the general weight of each category gives you the opportunity to keep your score as high as possible. Steps to take to responsibly manage your credit include:

• Pay your bills on time.
• Keep balances low on credit cards.
• Only apply for new accounts when necessary.
• Verify that your credit report is accurate.
• Make a plan and pay down your debt.
• Close your credit card accounts if you don't use them.

To learn more about many of the topics mentioned, you may wish to read the related articles in our Library.