A credit score in the United States is a number representing the creditworthiness of a person or the likelihood that person will pay his or her debts. It has shown to be very predictive of risk, made credit more widely available to consumers and lowered the cost of providing credit.

It is a numerical expression based on a statistical analysis of a person’s credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information, typically sourced from credit bureaus.

A credit score is a numerical expression based on a statistical analysis of a person’s credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information typically sourced from credit bureaus. Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. Lenders also use credit scores to determine which customers are likely to bring in the most revenue. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system. Credit scoring is not limited to banks. Other organizations, such as mobile phone companies, insurance companies, landlords, and government departments employ the same techniques. Credit scoring also has a lot of overlap with data mining, which uses many similar techniques.

Credit Score Rating Scale in 2011

Credit Score Description
730 – 850 Excellent
700 – 729 Great
670 – 699 Good
585 – 669 Average
300 – 584 Bad

 

Credit Score FAQ

 

What is a Good Score?

When lenders talk about “your score,” they usually mean the FICO® score developed by Fair Isaac Corporation. It is today’s most commonly used scoring system. FICO scores range from 300-850, and most people score in the 600s and 700s (higher FICO scores are better). Lenders buy your FICO score from three national credit reporting agencies (also called credit bureaus): Equifax, Experian and TransUnion.

In the eyes of most lenders, FICO credit scores above 700 are very good and a sign of good financial health. FICO scores below 600 indicate high risk to lenders and could lead lenders to charge you much higher rates or turn down your credit application.

Not Just One Score

There are many types of credit scores. They are developed by independent companies, credit reporting agencies, and even some lenders. As a rule, the higher the score, the better.

  • Each credit reporting agency calculates your score and each score may be different because the credit history each agency has about you may be different. Lenders may make a credit card or auto loan decision based on a single agency’s score, although others such as mortgage lenders often will look at all three scores.
  • Your credit score changes when your information changes at that credit reporting agency. This is good news! It means you can improve a poor score over time by improving how you handle credit.
  • Many insurance companies use something similar when setting your insurance rates, called a “credit-based insurance score.” You may be able to improve your insurance score by improving how you handle credit, which in turn may lower your premium payments on auto or homeowners insurance.
  • Some credit scores offered to consumers are just estimates and are different from the credit risk scores lenders actually use, although they may appear similar. Consumer reporting agencies and other companies sometimes use an estimated score to illustrate a consumer’s general level of credit risk. How might you tell whether a score is estimated? Ask the company if the score is used by most lenders. If it isn’t, it is likely to be an estimated score.

 

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Five Parts to Your FICO Credit Scores
As a rule, credit scores analyze the credit-related information on your credit report. How they do this varies. Since FICO scores are frequently used, here is how these scores assess what is on your credit report.

1. Your payment history – about 35% of a FICO score
Have you paid your credit accounts on time? Late payments, bankruptcies, and other negative items can hurt your credit score. But a solid record of on-time payments helps your score.

2. How much you owe – about 30% of a FICO score
FICO scores look at the amounts you owe on all your accounts, the number of accounts with balances, and how much of your available credit you are using. The more you owe compared to your credit limit, the lower your score will be.

3. Length of your credit history – about 15% of a FICO score
A longer credit history will increase your score. However, you can get a high score with a short credit history if the rest of your credit report shows responsible credit management.

4. New credit – about 10% of a FICO score
If you have recently applied for or opened new credit accounts, your credit score will weigh this fact against the rest of your credit history. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur. If you need a loan, do your rate shopping within a focused period of time, such as 30 days, to avoid lowering your FICO score.

5.Other factors – about 10% of a FICO score
Several minor factors also can influence your score. For example, having a mix of credit types on your credit report – credit cards, installment loans such as a mortgage or auto loan, and personal lines of credit – is normal for people with longer credit histories and can add slightly to their scores.
Some Credit Score Questions Answered:

First of all, what exactly is a credit score?

A credit score is a number that is designed to provide a numerical assessment of an individuals creditworthiness, which represents the perceived likelihood that an individual will pay their debts in a timely manner. It is provided to financial institutions and other businesses by credit bureaus.

What is the best credit score?

The highest possible FICO score is purported to be 850 and the lowest score is 300.

What is a good credit score?

As with many things in life, it depends on who you ask. According to Fair Isaac Corporation, the creators of the FICO scoring model, a score above 700 is good. However, for the purpose of getting a home loan each lender has different guidelines and you should consult with your bank or mortgage broker for more specific information.

What is a bad credit score?

As it relates to home loans, it has been reported that scores below the mid-600s will generally only qualify for subprime mortgages, however, again each lender has different guidelines and you should consult with your bank or mortgage broker for more specific information.

What is the average credit score?

According to Fair Isaac, the median credit score is 725, however, only about 75% of the eligible population (over 18) have credit scores so the data is incomplete.

Where can I get my credit score?

You can order your FICO credit score from myfico.com. Also, when you apply for a home loan many mortgage brokers will provide your score if you ask them.

Where can I get my free credit report?

You are entitled to get one free copy of your credit report per year from each of the 3 credit bureaus. Go to www.annualcreditreport.com to order your free report. Note that there are many other sites where you can buy your report, but this site is the official site created to comply with the Fair Credit Reporting Act.

How will my credit score affect my home loan or mortgage?

When you apply for a home loan or mortgage, the lender will request a copy of your credit report and the accompanying credit score from one of the credit bureaus. The higher your score is, the easier it will be for you to get a home loan. Your credit score will also affect the interest rate that the lender offers you, which influences how much your monthly payment is.

How do they calculate credit scores?

The credit scores are generated based on statistical model based that incorporates the information contained in your credit report. There are several different categories of information that are used, such as: Payment History, Amounts Owed, Length of Credit History, Types of Credit Used, and New Credit.

How do I improve my credit score?

There are many different ways to improvde your credit score, however, it is important to understand that your credit score does not necessarily update immediately and that it may take time for any changes to be reported to the credit bureaus. The first step is to obtain a copy of your credit report to see what information is being reported about you. If there are any inaccuracies, then you will want to take the steps necessary to correct the information on your report. Some of the other things that you can to do improve you credit report are:

  • Pay down your credit card debts
  • Make sure you pay your bills on-time every month, especially credit cards and loans
  • Request to have your credit limits increased
  • Keep your oldest credit accounts open
  • Don’t apply for new credit cards too often

What is a Credit Bureau?

They are the businesses that create, store, and sell the information in your credit files. In the United States, there are three major credit bureaus or credit reporting agencies: Experian, Equifax, and TransUnion.

Where does the information on my report come from?

The information contained in your credit report is primarily provided to the credit bureaus by the financial institutions that you have credit relationships with. For example, credit card, auto loans, personal loans, and home loans are the most common.

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