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People seem to be talking about credit scores a lot these days. But what exactly are they, and why are they so important? Here’s what you need to know about credit scores and how they can affect your life.

The Basics

Credit scores measure how much of a risk you are as a borrower, and actually you have three scores. The major credit bureaus (Equifax, Experian and TransUnion) each receive reports from your lenders, creditors and companies you do business with and analyze this information to calculate a three-digit number, typically between 300 and 850. The higher this credit score is, the better risk you’re considered. Each bureau has its own methods, so the three numbers may not be identical. 

Key Factors

Five basic elements go in to calculating credit scores: 

  • 35% is based on payment history.
  • 30% comes from your total debt compared with your available credit.
  • 15% is determined by the length of your credit history.
  • 10% is derived from new credit accounts, which signal caution.
  • 10% depends on the types of credit you have. Credit card balances are considered riskier than installment loans, for instance, and diversification reduces your risk profile. 

Why It Matters

Credit scores have a big effect on financing opportunities. High scores help win approval for low-rate loans as well as credit cards with attractive terms and perks. An excellent score can cut more than 1 percentage point off a mortgage rate. 

As if this wasn’t reason enough to take your credit score seriously, these numbers carry weight in many other areas too. Landlords often run credit checks on prospective tenants and won’t accept those with low scores. Employers also may consider credit scores when hiring. Insurers and vacation-rental agencies may offer the lowest rates and best deals to those with higher scores. Bad credit can even mean huge deposits for utility hookups and being excluded from better cellphone plans.

Get Your Score

Television commercials advertising free credit scores abound, but many of these sponsors require a credit card number and then bill you for automatic score updates. You can get your score by paying a small fee to each of the three credit bureaus. 

You’re also guaranteed a free annual credit report from each bureau by law. Although these don’t show your score, they’ll alert you to any problems so you can take steps to correct them. To order reports visit or call 877-322-8228. 

Boosting Your Score

If you want to improve your score, here’s how:

  • Pay all your bills on time.
  • Use credit regularly but keep balances below 30% of your charge limit.
  • Don’t apply for multiple credit cards and loans simultaneously.
  • Diversify between credit cards and different types of loans.
  • Monitor your score and credit report regularly. 

If you don’t have a credit history but have some cash stashed away, lenders like Southeastern Credit Union can provide a loan backed by money placed in a savings account. By paying at least the minimum due on time each month, you can create a creditworthy track record. Also, you may be able to obtain a charge card from a retailer or an oil company that will also help you develop a good credit history, provided you pay your bills on time.

It does take some time to improve credit scores, but your efforts will pay off in the long run.

Roberta Pescow, NerdWallet