What Every Consumer Should Know About Credit Scores

If you've ever applied for a loan, from a mortgage to a credit card, you've probably heard the term "credit score." You may even know that credit scoring is a way for lenders to evaluate a person's credit worthiness using a mathematical formula. But you may still have questions on what information goes into the evaluation, how the score is calculated and how it is different from your credit report.

"Consumers should know the answers to these questions and how credit scores affect their overall financial situation," says Maxine Sweet of Experian, a company that provides consumers with tools and services to help them understand, manage and protect their personal credit profiles.

She explains that credit scores are determined using information found in your credit report such as payment history; current level of debt; types of credit accounts; length of credit history; and number of credit inquiries.

"This information is then compared with the past credit performance for consumers with similar profiles to predict who is most likely to repay a debt," says Sweet. While each major credit reporting agency has its own method for calculating credit scores, the national scoring models have been fairly well standardized so that a "600" score at one bureau is roughly the equivalent to the same score at another. The Experian-developed PLUS Score model ranges from a score of 330 to 830. A higher number indicates a lower credit risk, which means people with high scores have a better chance of obtaining loans at the best interest rates.

"Some people think credit scores are only used in determining eligibility or rates for mortgage loans. However, some form of a scoring model is often used when you apply for a credit card, auto loan, auto insurance, employment, or when you rent an apartment," says Sweet.

Since credit scores are important for so many transactions, it pays to know where you stand. Consumers can find out their credit score at the National Score Index (www.nationalscoreindex.com) and also see how their credit score compares to consumers in their home state as well as geographic regions around the country.

For example, you'll find out that the national average credit score is 678 (is your state higher or lower?); the national average debt is $10,581 (where do you fit in?); and the national average number of open credit cards per consumer is three (are you above or below average?). The site also provides lots of useful information to help you understand more about your credit score and overall financial health.

Easy to understand and simple to use, the National Score Index tells you what factors drive your score up or down, and what you can do to better manage your credit. Most of all, you'll have the security of knowing where you stand regardless of who you turn to for your borrowing needs.

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