Your credit score: What’s in a number?

Cheryl

So after reading entries from Barbara and Kathy, we should all probably know how important it is to keep your credit healthy and why you should check your credit report from time to time.

But if you're anything like me, you probably still have five bajillion more questions about this thing called a "credit score." Like how is it calculated? What can you do to improve it? And what's considered a "good" score?

I mean, seriously, did you ever imagine that another ambiguous number could mean so much to people since your SAT score? 

I did some investigating and figured I should share this with people who care (and if you've read this far, you must!). Basically, your score measures how likely you are to pay someone back. The higher your score, the more dependable you appear to potential lenders. Scores can range from 300 to 850 and are calculated using the information in your credit report. A lender will offer you a better interest rate the higher your score. Having a low score can lead to higher interest rates and you may even have trouble getting approved.

Keep in mind, your credit score considers all of the above and not just one or two of these things. Take a look at the graph above to see how it breaks out according to MyFICO.com .

With that, here is the skinny on how to keep your score as high as possible:

1. Always pay your bills on time.
   It spells trouble in River City  if you let any of your accounts go unpaid 30 days after the due date. Not only do you get dinged with a late fee, this also can drop your score way down, especially if you had a perfect record before. If this happens even once, it could remain in your credit history for up to seven years. And as Rollo says in Juno : "That ain't no etch-a-sketch , that's one doodle that can't be undid, homeskillet."


2. Pay off your debt.
   By always paying off your credit card balance on your cards and keeping the amount you owe to a minimum, you can improve your score and prove you are dependable to potential lenders.


3. Be selective.
   If you don't have a lot of credit history, opening a lot of accounts like gangbusters  can hurt your score. So resist opening a new card at every retailer who offers you a discount and choose your cards strategically. Personally, I tend to use one card that can be used everywhere. This allows me to earn rewards points or cash back faster AND makes paying my monthly bills a lot simpler!


4. Keep your oldest accounts open.
   Established credit accounts are great for showing credit history and adding to your score. Closing your oldest account would eradicate any good credit attached to it. And the lame part is it doesn't work both ways. If you close an account with a mediocre history, that history stays with your credit score.
5. Mix it up.
   Having a variety of credit — retail cards, bank cards, installment loans, etc. — can benefit your score. But since this is worth just 10% of your score, you shouldn't be opening new credit just to diversify your mix. Make sure you really need the credit.

So now that you're a little more familiar with what your credit score means and how it's calculated, you're probably dying to find out how you're doing, right? Well, you can pull it the old school way, at AnnualCreditReport.com , where you are entitled to one free credit report per credit bureau per year (the report is free, but you will have to pay for your score).

If you want to monitor more frequently without paying for an ongoing service, peep this out: a new site called Credit Karma  (still in beta) just entered the scene and it will simulate your score anytime, anyplace!

Editor's note: Please join us in welcoming Cheryl, who shares Barbara's penchant for discount designer shoes, as the newest Student LoanDown blogger.