Credit 101: How your credit score can help or hurt you

In this tough economy, there's been a lot of talk about debt and how it affects credit scores. If the concept of credit scores confuses you, you're not alone. Here is a clear look at what a credit score is and how it is used.

What is a credit score?
Simply put, your credit score is a number that is representative of your creditworthiness. Basically, it shows how responsible you are with your money and how likely you will be to pay your bills on time and in full. A good FICO score ranges from around 700 to 850, while the average FICO score is between 660 to 699. Poor credit scores tend to range from 619 and below.

How is a credit score calculated?
In the United States, you'll receive a credit score from each of the three major credit bureaus. This is your FICO score. For your three scores to be calculated, each report must contain at least one account which has been open for at least six months and updated in the past six months. This ensures there is enough information to calculate a score.

Here is how credit history typically affects your credit score:
1. Past payment history - 35 percent
2. Outstanding debt - 30 percent
3. Length of credit history - 15 percent
4. New credit - 10 percent
5. Types of credit - 10 percent

Why should you care about your credit score?
The higher your credit scores, the better, because that tells lenders you are a low risk. This can help should you want to obtain a car or home loan. But having a good credit score can help you in many other ways too, such as if you're trying to rent an apartment. Some employers may also look at credit scores for new job applicants as a representation of their responsibility level.

You credit score may also affect the cost of renters insurance. Whether you need to buy home insurance, need insurance for condominiums, or simply want personal property insurance, your credit score will help determine how much your policy will cost. If you want cheap property and casualty insurance, it will help if you keep a good credit score.

What if you have a low score?
Credit scores change over time and may go up or down from one month to the next. If you did your research and found your scores to be lower than you'd like, it's time to do something about it. Review your credit history and make sure there are no mistakes or incorrect information. Use your credit cards lightly. And always pay bills on time.