Your credit score reflects how reliably you’ve paid your bills in recent years. It indicates how much interest you’ll pay on loans and financing. A low credit score can means hundreds of dollars a month in higher interest rates. This is the purpose of credit scores. If you have a history of paying late, you pay more. How long your past experiences affect your score varies. In general: missed payments remain on your report for seven years; most public record information remains on your report for seven years; Chapter 7, 11 and 12 bankruptcies remain on your report for 10 years; and unpaid tax liens remain on your report for 15 years. Lenders don’t like to see too much debt on your credit report. Having too many credit cards with high balances makes you a less appealing risk. So does having a lot of credit cards with high credit limits, even if you haven’t run up big balances. We’ll consider all of these issues in greater detail later in this book. In this chapter, we’ve just focused on the mechanics of credit scores.

Your credit score will have a profound effect on whether or not you qualify for a loan, a credit card or some other form of credit. What's more, your score will influence the price you have to pay for that credit. The higher your score, the lower your interest rate. Your credit score can even have an effect on credit cards you already have. That's because some card issuers check your credit score before increasing your credit limit-or increasing your interest rate.

Fair, Isaac's credit scoring formulas take into account and weigh various pieces of information from your credit report. The information and weights include: the type of accounts you have (mortgage, car loan, credit cards), 10 percent; the number of recently opened accounts and their proportion to your overall credit, 10 percent; your payment history, 35 percent; the amounts you owe, 30 percent; and the length of your credit history, 15 percent.

Credit reports can be several pages long, so it's not surprising that credit scores were developed as a sort of shorthand-and as a more objective way to evaluate consumers. In order to determine your credit score, some of the information in your credit report is fed into a mathematical formula, which spits out the three-digit number that lenders use to predict whether you are likely to pay back a loan (or a credit card debt) in full and on time. As we've noted, supporters of credit scoring point out that it has created more uniformity in lending, in part by removing the subjective human factor. Instead of having loan officers look over your credit report and application-filtered through their own judgments, experiences and biases-the process is now largely automated.

As surprising as it can be to learn just how much detail about your life is available to creditors and even to companies in search of potential customers, it may be even more surprising to learn what’s not in your credit file. Your credit report does not contain information on: savings or checking accounts; bankruptcies that are more than 10 years old; charge-offs or debts that have been sent to collections that are more than seven years old; driving records; medical history (although medical bills may appear on your report as debts); or criminal records. For privacy and fair lending reasons, the credit report also cannot include your: gender; ethnicity; religion; or political affiliation.

Many types of events are a matter of public record—that is, the kind of information you can find out if you pay a visit to your local courthouse. These types of events may appear in this section of your credit report. They can include: bankruptcy or bankruptcies; tax liens; foreclosures; court judgments; and overdue child support. This information usually will remain on your credit report for seven years.

This section lists the accounts that you have with different lenders, retail stores, credit card companies and other businesses, including accounts on which you are listed as an authorized user (such as your spouse's credit card) and which will not be counted in your credit score. It includes the account numbers for each account, although these may be scrambled for security reasons. Sometimes, you'll find more than one account number for the same creditor. This could be because you moved or because the creditor assigned more than one account number to you. This isn't necessarily a cause for concern.

The identifying information section on your credit report is straightforward. It is compiled using the information you provide when you apply for credit.

According to the FTC, the FCRA-which went into effect in 1971-was designed to ensure that consumer reporting agencies, or CRAs, "furnish correct and complete information to businesses to use when evaluating your application." To help ensure the information is correct and complete, the Act ensures that consumers can check their own reports and make changes to them, if necessary.

How did all of this get started? In the very early days, when people bought things on credit at the general store, the store clerk wrote the purchase amount on a piece of paper that was then put into a "cuff." A cuff was a paper tube that merchants wore on their wrists. (This is also the origin of the term "buying on the arm"-another way to say buying on credit.)