Significance

Your credit score represents your payment history on current and past debt. It is an indicator to a potential lender as to the likelihood of you repaying the debt. It can also help to dictate the fee or interest rate that you will be charged when the loan closes.

Types

Three credit bureaus report your credit score to lending institutions--Equifax, Experian and TransUnion. Each score is different and calculated in different ways. Most lenders either pick one company to use or choose the middle score as the representation for your credit risk.

Features

The credit score reflects your payment history. If there are any negative items, such as collections, liens, late pays and judgments, your score is automatically lowered. A high score is above 720, while a low score is below 620. The closer to 300, the worse off you, as a borrower, are in terms of financing options.

Considerations

If you are first starting out in the financial world, you will automatically have a lower score because you do not have a lengthy credit history. Additionally, if you have recently accepted a large loan, such as a mortgage or car loan, you score will go down to reflect the new information, regardless of payment on that loan.

Misconceptions

Don't assume that once you pay a negative item, such as bankruptcy, judgment, lien or collection, that the item drops off your report and the score rises. However, the item is moved from unpaid to paid and still stays on your report for seven years. A paid negative item does reflect better on your score than an unpaid one.

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Truth about Credit Scores