Every time you want to buy something on credit, the vendor will run your details through a credit scoring agency before agreeing to the sale. For example, if you are looking for a loan through a home loan assistance program, or through FHA mortgage lenders, the lenders will check your credit score. The purpose of this is to establish whether you are a good risk. The credit scoring agency will give its assessment based on your previous borrowing history.
Your credit score is a three-digit number. The lower the number, the higher the risk. Credit scores can be roughly divided into three categories, namely good, fair and poor. There are slight differences between how each of the three credit scoring agencies (Equifax, Experian, and TransUnion) assess your score, so it is not possible to state categorically what precise scores mark the boundaries between the three categories.
According to Gershman Mortgage in St Louis, having a good credit score can make the cost of borrowing less expensive due to a lower interest rate and the elimination of having to obtain mortgage insurance. While having a poor credit score can make it more difficult to finance a mortgage at a low interest rate. It can even it make it difficult to get accepted as a tenant in rented accommodation.
If you are the type of person who has always made loan repayments in full when they were due, you are likely to have a good credit score. Essentially, any late payments have a negative effect on your score. The more of these you have had, the more it affects your score. If you have defaulted on all or part of a loan, that will have a serious effect on your rating, and you will get a poor score.
Your previous late payments or loan defaults are kept on record for a minimum of seven years. In some cases, your history over the previous decade may be taken into account. There is nothing you can do to alter your previous history except check that it is accurate. Each of the three credit bureaus will provide you with one free copy of your credit report per annum, but you need to request it. Your credit report will contain comprehensive information. You should examine it carefully to ensure there are no errors.
If you would like to get more details about how credit scoring works, there is some useful information here. The site also has good advice on how to avoid adversely affecting your credit score.