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Money Minute: Your credit score decoded

Mandi Woodruff

If you want to get a loan or apply for a mortgage, your credit score is everything. That's because it tells lenders how creditworthy you are. A low score means you're more likely to fall behind on your debts. You'll have a hard time qualifying for new credit, and even if you do, you'll likely be hit with a super high interest rate. High scorers get the best rates on new credit because lenders can reasonably assume that they won't flake out on their payments.

That being said, do you really know how you score is calculated?

To simplify things, we're going to dive into the FICO score, which ranges from 300 to 850 and is the one most commonly used by lenders today. Once you know what factors go into your score, it's much easier to understand what kinds of moves you should make if you want to improve your score.

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There are 5 main factors that determine your FICO score:

Payment history. If your credit score was a pie, the biggest piece would belong to payment history. It accounts for 35% of your score. That means making on-time or late payments on all your credit accounts can really make or break you.

Debt balance. The next piece is how much debt you owe -- it makes up 30% of your score. Credit companies really like people who use less than 30% of their available debt limit. That means if you’ve got three credit cards with a total credit line of $10,000, you don’t want to ever carry a balance of more than $3,000 at once.

Length of credit history. 15% of your score is determined by how old your credit history is -- in general the older your accounts are, the better it is for your score.  But  even people who haven't been using credit long can have high scores, depending on how good the rest of their credit report is, according to FICO.

New credit applications. Applying for new credit takes up 10% of the pie. If you apply for new credit every other month, that sends a red flag to credit bureaus.

Types of credit. As for the types of credit you have, this constitutes another 10% of your score. It’s better to have low levels of revolving debt like credit cards and more kinds of non-revolving debt like a car loan or student debt. It just makes you look less risky.

Now that you know how your score is calculated, you'd probably like to know how to see your score as well. It costs about $15 to get your score from MyFico.com. If you don't want to pay up, some credit card companies have been adding credit scores to their customers' accounts as a kind of bonus. Barclaycard, First National Bank and Discover each provide the FICO score for free.

There are also plenty of free ways to check your credit score estimate online through sites like CreditKarma, Credit.com, Quizzle or Credit Sesame.

Just keep in mind that these sites don't give you your actual FICO score. They base your credit score on your credit history from one of the three major credit bureaus and then use their own algorithms to generate an estimate of your score. For example, Credit Sesame offers the Experian National Risk Score, which is based on data collected by Experian only. Similarly, Credit.com bases its free score on Experian data, offering both a VantageScore 3.0 and Experian credit score. Quizzle leans on Equifax data. CreditKarma offers scores based on Equifax and TransUnion data.

Unless you’re a brand loyalist, this shouldn’t concern you too much.  Your scores will undoubtedly vary across these platforms because no two services use the same math to get your score. However, rather than focusing on matching up your scores, look at where your score falls in the credit risk range. Each site has its own version of a chart that tells you whether your score makes you a poor, good, or excellent candidate for credit. No matter which site you use, your score should land you close to the same range in each. If one score is totally out of whack, it's a sign that there may be something fishy going on and you should review your credit history with that particular bureau.

More questions about credit? Drop us a line at yfmoneymailbag@yahoo.com.

Check out more from Mandi:

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