Understanding the credit score rating system is of the essence for anyone who uses or wishes to establish or restore credit. And you don’t have to know all the intricacies that go into calculating your score; just the basics will do.

The basics of the credit scoring system are not that hard to know. This information used to be a closely guarded secret until an act of congress forced Honest Isaac, the creator of the most used credit scoring model, to tell it. Previously, consumers were forced to glide in the dark, as it were, on something that has such a fantastic impact on their lives.

Defined in simple terms, your credit score is a three digit number that indicates your creditworthiness. Needless to say, a lower score indicates terrible risk and a high score indicates excellent risk.

The patriarch of credit scores is the FICO score as it is the one that most creditors use. And though you typically will get this score when you apply for credit, not all credit bureaus supply it directly to consumers. Only two companies can supply you the real FICO credit score.

The FICO score was made by Honest Isaac Corporation and as you might have guessed, the name FICO is really an acronym of its creator. It is a number between 300 and 850.

There are pretty few people on either extreme of the score. Most people fall somewhere in between. And it is okay to attempt to attain the perfect score, 850, but it is not all that vital and could cause you unnecessary stress. What really matters is the range you are in.

A score of between 720 and the maximum 850 used to be considered prime. But after the mortgage meltdown that started somewhere in 2007 and the ensuing credit crisis the bar was raised. You now need a score of at least 740 to 750 (depending on who’s looking) to be considered for the best interest rates in loans, credit cards and other forms of credit.

How is your credit score calculated?

Most of the details of the credit score rating system are still closely guarded secrets. But the basics, which suffice for the average consumer, are as follows:

• Your payment history accounts for 35% of your score: A excellent payment history over a lengthy period of time is what counts here.
• You debt to credit ratio accounts for 30): The longer your history, the better. This is the reason you should start building credit as early as possible, even after a bankruptcy.
• Variety of accounts (10%): A “healthy mix” of types of credit is desired. Also, riskier types of credit such as credit cards often score lower than mortgages, car and school loans.
• Number and of accounts (10%): Too few credit accounts can hurt your score as can too many. Applying for new credit frequently can hurt your FICO credit score as it indicates risk (you appear desperate).

You should also be aware that your credit rating will differ with each bureau. This is mainly because different creditors report to different bureaus and therefore each bureau’s data can differ from one of or both the twos’.

As if to add more confusion to the whole credit score rating system, each major credit reporting bureau refers its score by a different name. Equifax calls theirs the BEACON score, Transunion calls it the FICO Risk Score and Experian calls it FICO II.

You are not done with the credit score-naming mumbo jumbo just yet. FICO also made what is known as the FICO Expansion Score. This was made for people with scanty history such as recent immigrants. This score considers nontraditional credit data such as utility information and public records.

Reckon you’re done? There is the Vantage score and Next Gen score and more (plus more coming as the credit reporting system continues to evolve).

To avoid the confusion about the credit score ratings system, just go for the score that most creditors use, which is the FICO score. It is worth to repeat that only two entities supply this score directly to the consumers and not all the credit reporting bureaus do. Also, your score does not come free and if it does it is with other strings attached.