Determining what's behind a credit score

Q: How are personal credit ratings calculated? My credit rating seems to vary from one credit agency to another. I suspect it has to do with differences in how each company values different criteria. How do you calculate your credit score? What can improve my score? What can hurt a score? Do lenders like to see you carry a small balance, or is it better to pay off balances each month? Should I keep one credit card or should I have several accounts with different lenders?
C.S., Lakeville, Mass.

A: Banks, mortgage lenders, credit-reporting agencies, and private finance companies are all involved in credit rating and scoring, says Mike Kidwell, vice president and cofounder of Myvesta, a personal- finance website (www.myvesta.org).

Each, he says, assigns numerical values to different criteria about your personal financial situation. The higher your score, the more likely you are to receive credit and lower interest rates.

Ironically, having no credit works against a high score, Mr. Kidwell says. But having too much credit also hurts, since lenders might fret that you'll suddenly max-out all your credit lines and ring up huge bills.

It's also important whom you borrow from. For a high score, "lenders prefer that you use conservative, well-regarded companies," he says, not certain lenders that cater to risky borrowers. To boost your score, Kidwell suggests that you:

• Carry a modest number of cards, say two or three different major bank cards (such as Citibank Visa and Discover), perhaps an oil-company card, and one from a favorite department store.

• Carry small-to-medium balances on your cards, make payments on time, and pay them off in full every now and then.

• Avoid late payments and keep your debt down in relation to your income.

One of the largest scoring companies is Fair, Issac & Co. The company runs a website (www.myfico.com) that explains the basic of credit scoring. It also allows you to obtain your score along with a credit report from the agency Equifax. Price: $12.95.

Kidwell says there are other scoring companies little known to the public. Each, he says, tends to use its own proprietary scoring systems, usually computer generated. Lenders often turn to these companies for the actual scoring process.

Finally, Kidwell suggests you check your credit report at least annually. Use a "consolidated" credit report that pulls data from different agencies. The Myvesta website has a link for obtaining a consolidated report.