Credit is probably one of the most important, least understood aspects of personal finance. Credit scoring affects every major purchase in your life, from cars to school to houses. Good credit opens doors, bad credit closes them. But what is credit, and why does it matter to you?

WHAT IS CREDIT?
Fundamentally, credit is a record of how timely you are in paying back money you have borrowed. Your credit is stored as a report and a score at a credit bureau.

Where is credit used? Credit scores are used by any organization that deals with the lending of money, from credit cards to colleges to realties. Companies that judge risk use your credit score, such as insurance agencies. Here is a short list of company types that are known to check your credit:

• Banks & credit unions
• Employers
• Cable & telephone service companies
• Insurance & HMOs
• Cellular and Internet service companies
• Mortgage, loan, and credit card companies
• Colleges and private schools
• Automotive Lenders

How is credit judged?
Credit scores are numerical indexes based on an algorithm developed by Fair Isaac Company, called a FICO score. Scores are negatively impacted by events such as late payment, incomplete or partial payments, defaults, and judgements or liens, and range from 300 to 900. The actual algorithm is a trade secret of Fair Isaac, but the following breakdown approximates the weighted values that compose your score.

35% Payment history
30% Outstanding debt
15% Length of your credit history
10% Recent inquiries on your credit report
10% Types of credit in use

The "average" credit score for "good" credit is 675 or better for most major lenders, such as mortgage lenders. Scores lower than 625 demand scrutiny, while scores lower than 600 will often be denied outright.

How do companies judge my credit?
Many companies have begun to institute automated loan decisioning, in which your credit score is requested from one or more credit bureaus and then matched against an arbitrary index. For example, a mortgage company may decide not to lend to any individual with a credit score less than 600. Other companies go one step further and assign levels of risk to lower scores; a borrower with a near-perfect score may receive a much lower interest rate on a loan or purchase than a borrower with a poor score. Still others may automatically decline an application if a certain FICO reason code is included in the report.

Below is a generalized average rating of FICO scores. Most lenders look for acceptable or better scores; each lender makes a decision about what level of risk they are willing to accept.

Excellent ("Class A borrower"): over 720
Acceptable ("Class B borrower"): 660 to 720
Uncertain ("Class C borrower"): 620 to 660
High risk ("Class D borrower"): less than 620

These scores plus the FICO score form the basis for loan decisioning. Order your Credit Report Today and know where you stand with lenders. How to dispute an item on your credit report?

The Fair Credit Reporting Act allows credit reporting agencies "a reasonable period of time" to investigate consumer disputes. If you wish to dispute information on your credit report call the following:

Equifax: 800-685-1111
Experian: 800-831-5614
Trans Union: 800-634-8440