What is credit? What is a credit report? What is a credit score? Where can I safely get a copy of my credit report for free? These are some of the most important questions in personal finance and they will be addressed in this article. The subject of credit scoring has become an increasingly hot topic, and for good reason. For many years, the general public only associated the concept of credit scoring with the need to purchase high−ticket items such as a new car or a home. Today, credit scoring goes much further. Your credit score can affect your ability to get a good rate on commodities such as car insurance, cell phones, or even determine whether or not you get the job that you want. Indeed, the financial snapshot provided by the credit score has also become a gauge for many employers, especially those who seek to place employees in a position of financial responsibility.What is Credit?Credit is like a report card telling you how well you have paid your bills. Credit is a record of how you pay your credit cards bills, auto loans, mortgage loans, etc. Whenever you buy something with a monthly payment, the people who you collect your bill report this information to create a credit report. Examples include buying furniture on credit or using a Best Buy store card to purchase a computer. Exceptions include utility bills, cell phone bills, and rent payments. Collection accounts, court judgments where you owe money, and bankruptcies are also part of your credit.Who Collects My Information?There are only three companies in the U.S. that collect all your credit information. They receive this data from all of your creditors, like the credit card company or your auto loan company. The companies are Equifax, Transunion, and Experian, also known as credit reporting agencies or credit bureaus. They compile all the information they receive and create a credit report on you.What is a Credit Report?A credit report is a document that shows all the information collected by the credit bureaus. A “tri-merge” or “merged” credit report contains the information from all three credit bureaus in one report. This report lists all your past credit accounts that have been reported to the credit bureaus. The report lets you know how much money you owe to creditors, what your available balance is, and your complete payment history, including any late payments. The credit report can also list your current and former addresses and even employers. Additionally, the credit report will also give you a number that each credit bureau assigns to you, called a credit score.What is a Credit Score?A credit score is a number from 300 on the low end to 850 on the high end. Each of the three credit bureaus will evaluate your credit to determine your score, and each bureau will give you a score. The higher the number, the better the credit history. But, exactly how do they assess what’s on your credit report to give you a number?What Makes Up My Credit Score?There are five parts to your credit score (also known as FICO score). Points are awarded for each of these five parts, and a high score is most favorable. The factors are listed below in order of importance.1. YOUR PAYMENT HISTORY − 35% IMPACT on your credit scoreHave you paid your credit accounts on time? Paying debt on time and in full has the greatest positive impact on your credit score. Late payments, judgments and charge−offs all have a negative impact. Missing a high payment will have a more severe impact than missing a low payment, and delinquencies that have occurred in the last two years carry more weight than older items.2. HOW MUCH YOU OWE vs. AVAILABLE CREDIT − 30% IMPACT on your credit scoreThis factor marks the ratio between the outstanding balance and available credit. Ideally, the consumer should make an effort to keep balances as close to zero as possible, and definitely below 30% of the available credit limit when trying to purchase a home. The more you owe compared to your credit limit, the lower your score will be.3. LENGTH OF CREDIT HISTORY − 15% IMPACT on your credit scoreThis portion of the credit score indicates the length of time since a particular credit line was established. A seasoned borrower or longer credit history will always be stronger in this area. However, you can get a high score with a short credit history if the rest of your credit report shows responsible credit management.4. TYPE OF CREDIT − 10% IMPACT on your credit scoreA mix of auto loans, credit cards, personal lines of credit, and mortgages is more positive than a concentration of debt from credit cards only.5. INQUIRIES − 10% IMPACT on your credit scoreThis percentage of the credit score quantifies the number of inquiries made on a consumer’s credit within a six−month period. Each hard inquiry can cost from two to 25 points on a credit score, but the maximum number of inquiries that will reduce the score is ten. In other words, 11 or more inquiries within a six−month period will have no further impact on the borrower’s credit score. Note that if you run a credit report on yourself, it will have no affect on your score. Credit scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur. If you need a loan, do your rate shopping within a focused period of time, such as 30 days, to avoid lowering your credit score.Additional Resources:To order your free credit report, go to this outlet established by the U.S. Congress:www.annualcreditreport.comTo read the Fair Credit Reporting Act, go to:www.ftc.gov/os/statutes/frca.htmFor the Federal Trade Commission’s information on consumer credit, go to:www.ftc.gov/bcp/conline/edcams/credit/index.html [http://www.ftc.gov/bcp/conline/edcams/credit/index.html]To get additional education about your credit and how to improve credit scores, go to:www.ivanbarriga.com [http://www.ivanbarriga.com]