do you know the score?

Your creditors do and if you don’t, you may be losing in the “credit game”. Lenders use credit scores to determine who should get credit, and more importantly at what interest rates. Under the Fair Credit Reporting Act and more recently the Fair Accurate Credit Transactions Act, consumers are entitled to a free copy of their credit report from each of three nationwide consumer reporting companies – Equifax, Experian and TransUnion – once every 12 months. However, unlike a credit report, which simply tracks your bill-paying habits as reported by your creditors, your credit score is determined by complex models which assign a weighting to other variables in your personal financial history.

According to one credit score model, the breakdown of your score is as follows:

• 35% of the score is determined by payment histories on your credit accounts, with recent history weighted a bit more heavily than the distant past;
  
• 30% is based upon the amount of debt you have outstanding with all creditors;
  
• 15% is produced on the basis of how long you've been a credit user (a longer history is better if you've always made timely payments);
  
• 10% is comprised of very recent history, based on your efforts to obtain loans or credit lines in the past few months;
  
• 10% is calculated from the mix of credit you hold, including installment loans (like car loans), leases, mortgages, credit cards, etc.

As is evident in the weighting, a series of late or missed payments can dramatically lower your credit score, because this component carries the greatest weighting in the scoring calculations. And the total amount owed is another heavily weighted factor so using up a large percentage of your available credit counts heavily against you. For that reason, you may not want to consolidate all your credit-card debt on one card, nearing the limits. While that strategy could make debt easier to pay down, it can also weigh against you in the scoring process – something to should consider if you're about to seek a mortgage loan.

Credit scores range from 300 to 900; here in Texas the average score is 649. Your credit score can impact your finances for many years. Nearly three-quarters of all mortgage lenders and loan rate decisions use the credit score as a key factor.

So how much of a difference can your credit score make? The difference between a low score of sub-600 and a score of at least 720 could make a huge difference in the interest rate you qualify for on a mortgage – and more importantly dollars saved or lost. For example, on a $140,000 home loan your interest rate could range from 6% to 12%, or higher, equating to a difference in payments of $600 per month or more than $216,000 in additional interest payments over the life of a 30-year mortgage!

Lenders know the score and you should too. For your copy of your credit report and credit score go to myFICO now – plus at this site you can learn how to improve your score through simulators, set up monitor alerts for your score and access identity theft solution services.

Note: The Federal Trade Commission (FTC), the nation's consumer protection agency, has prepared a brochure, Your Access to Free Credit Reports, explaining your rights under the FCRA and how to order a free annual credit report. This free annual credit report however does not contain your credit score as determined by each of the three nationwide consumer credit reporting companies: Equifax, Experian and TransUnion.