Everybody knows that credit reports are the report cards for how well you’ve handled your finances. The problem is that many people don’t understand how they work. Your credit score is made up of five items:

1. 35% is based on your payment history. Do you pay your bills on time? Do you have collection accounts? Have you filed bankruptcy?

2. 30% is based on outstanding debt. How much do you owe on your home or car? How close are your credit cards to being maxed out? A good rule of thumb is keeping your credit cards at 25% or less of their credit limit.

3. 15% is based on the length of time you’ve had credit. If you’re a new borrower, that will count against you.

4. 10% is based on the number of inquiries on your credit report. A lot of inquiries can translate into a lower score.

5. 10% of your score is based on the types of credit you have. A rule of thumb is to have 2-3 trade lines (e.g. mortgage, car loan, student loan, credit cards, etc.)

The three credit bureaus, Experian, TransUnion and Equifax, use this information to calculate your credit score. Everyone is allowed one free credit report per year from each bureau, which you can obtain at www.annualcreditreport.com or by calling 877-322-8228. Keep in mind that each bureau figures your score in a slightly different way, so your reports from each company may list different items.

So how do you know if you’ve made the grade? The lower the score, the less access you’ll have to credit and the higher interest rate you will pay. Below 600 may mean you’ll be rejected for credit or pay higher sub-prime interest rates. A score in the low 700s means you’ll have a very good chance at obtaining credit at a low interest rate.

It’s important to establish and maintain good credit. More and more businesses are using credit scores to make important decisions— including for housing rental, employment, auto insurance, phone and utility services, and more. Keep in mind that it’s never too late to turn your credit around. If you need help or suggestions, feel free to contact us toll-free at 877-500-3580 from the 920 and 715 area codes. People not in those area codes can call (920) 437-7531.