3 Things You Probably Didn't Know About Your Credit Score

Your credit score can have an outsize effect on your financial life, as it factors into the rates you get on your mortgage, credit cards, and any other loans you might take out. We asked three Motley Fool contributors to discuss the most important things people commonly don't know about their credit scores.

: To start, there is not just one score.

The big three credit bureaus -- Equifax, Experian, and TransUnion -- each compile credit reports on you. Different lenders then use your credit reports however they want. Each credit agency has multiple credit scores for you available for companies in different industries. Many companies also use their own algorithms to parse one or more of the reports to determine if you are a good credit risk. That is why it is important to study your credit reports each year and make sure the data is accurate.

While many paid services help you do this, a 2003 federal law enables you to access your three credit reports for free once every 12 months. This can be done at theAnnualCreditReport.comwebsite, which isrun jointly by the big three credit bureaus under the FACTA federal mandate.

The more popular paid service, which is owned by Experian and which it used to pay millions to advertise before a settlement with the Federal Trade Commission, is FreeCreditReport.com, but it assuredly is NOT free. You have to pay $1 to get your Experian credit report; you also get your credit score, and then you are placed in a seven-day free trial for FreeCreditReport.com that will afterward charge $14.99 per month if not canceled.

Dan Caplinger: Most people understand why credit scores are important, but few know the elements that go into determining their score. Fortunately, FICO, the company that produces the most commonly used credit score, provides the basis for their scoring.

The primary factors in determining your credit score are the quality of your payment history, which accounts for 35% of your score, and the amounts you owe, which makes up 30% of your score. As a result, making payments on time and resolving any missed payments quickly, while being smart about taking out manageable amounts of debt and not maxing out your credit limits, can get you a better score.

However, there are three other factors. Length of credit history makes up 15% of your score, while your mix of different types of credit and the amount of new credit you've taken out recently count for 10% each. As you gain more experience with credit, therefore, your credit score will typically improve. Paradoxically, those who have relatively little debt can have lower credit scores, as FICO rewards those with a mix of credit cards, mortgages, and other types of installment loans as having proven a more reliable history.

Knowing how your credit score is calculated can help you focus on fixing the things that bring it down. The best way to maximize your score is to pay on time and be prudent about debt.

Jordan Wathen: As Dan Caplinger mentioned, five factors go into your credit score. But one factor -- your utilization -- plays an outsize role.

Credit utilization is simply the amount of credit you use relative to how much is available. If you have a credit card with a $500 limit that is carrying a $200 balance, your utilization rate would be 40%. The ideal level of utilization is 30% or lower, which is only $150 for a $500 card.

Many people falsely assume their utilization will be 0% if they pay their cards in full each month. This isn't true. Credit card companies report your balances monthly, and the report only reflects this snapshot in time. Thus, people who have low-limit credit cards typically have a lower score than they should because their utilization is high from month to month, even if they pay in full.

One way to avoid this is to ask for a credit limit increase to ensure your monthly spending never puts you over 30% utilization. Another way is to make more frequent payments on your card. Either way, since utilization can make up as much as 30% of your score, this is one factor that you should seek to optimize, particularly if you expect to shop for a big loan -- a mortgage or car loan, for example -- in the near future.

The article 3 Things You Probably Didn't Know About Your Credit Score originally appeared on Fool.com.

Dan Dzombak has no position in any stocks mentioned.He is a long-term investor and writes about happiness.Dan Caplinger has no position in any stocks mentioned. Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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