Your Credit Score From Your Consumer Credit Report

If you know your driver's license number, you should know your credit score. This 3-digit number determines much of your financial life, and functions as your financial calling card. It wasn't always that way.

Remember the old Jimmy Stewart movie, "It's a Wonderful Life"? Stewart plays a banker at a savings and loan who has given credit to the poor to help them build decent houses. Now he faces ruin at the hands of a heartless Lionel Barrymore, who has found a misplaced bank deposit, called in the auditors and hopes to start a run on Stewart's bank. But the "little people" whom Stewart put his faith in prove him right. They stream in with their dimes and quarters to bail him out.

Fast-forward half a century. A computer has replaced Jimmy Stewart. Whether you get a loan or not depends on a computer-generated credit score. This credit score is based on things like how much money you earn, how long you've been using credit and whether you've made your payments on time. It's all about predicting your behavior ahead of time. Your lenders use the score to estimate if you're a good credit risk and what the chances are that you'll default on your loan or bill. Every time you open a new charge account, apply for a loan, or get an insurance quote, someone views your credit score to make their decision.

Your Right to Know
For years, the credit scoring process was shrouded in mystery. The credit bureaus and scoring firms said that if they revealed the scoring system -- and the exact criteria to determine that score -- their services wouldn't be needed anymore. Pressure by Congress and consumer groups eventually caused these firms to release a list of the criteria used to determine credit scores. In 2005, you became legally entitled to check your own credit report on the Web for free.

Improving Scores

Your credit score is based on factors within your credit report. To improve your score, pay close attention to these factors:

The amount of debt you carry relative to your total credit limits

Whether or not you pay on time

Stable address and job history

Good payment history is key

The scoring system looks at how close you are to the limits on your cards, what you spend money on and how much you ask for in cash advances. Pay attention to these things and modify your behavior as needed so your credit history shows responsibility. A concerted effort to build your scores over time really works.

Credit Scoring and U.S. Economy
If all of this sounds unfair, remember that scoring systems have allowed department stores and other lending agencies to offer those "on-the-spot" credit approvals that make life easy. You fill out some basic information on a card and five minutes later, you're either approved or disapproved for a loan.

Some believe scoring helped fuel the economic boom of the 1990s because it allowed credit issuers to grant much more of it -- 20% to 30% more. In the past, only those with great credit had access to a broad spectrum of credit cards. Now, it's much easier for everyone.

However all this easy availability has helped many Americans plunge into downward spirals of debt, foreclosure and embarrassment. There's also the matter of credit scoring security. Credit scoring databases contain billions of bits of information. That's a lot of information to keep straight.

The credit reporting system depends on databases that are supposed to be fail-safe. But could the credit database have a flaw that could destroy your hopes of buying a new home? The FTC (Federal Trade Commission) has taken steps to ensure that doesn't happen. It's called the Safeguard Rule and mandates extensive security measures any company that deals in credit information must take by law.