In general, your credit score is a number that lets lenders know how much of a credit risk you are. This number is usually between 300 and 850 and depends on how well you are paying your debts and managing your financial responsibilities.
The higher your credit score, the better credit risk you make and the more likely you are to be given credit at great rates.
Scores in the low 600s and below will often give you trouble in finding credit, while scores of 720 and above will generally give you the best interest rates out there.
However, credit scores are a lot like GPAs or SAT scores from college days – while they give others a quick snapshot of how you are doing, they are interpreted by people in different ways. Some lenders put more emphasis on credit scores than others.
Your score is based on your credit report, which has a history of your past debts and repayments. The credit bureaus use computers and mathematical calculations to generate your credit score based on the information they find in your credit report.
Each credit bureau may use a different method to do this (which is why you’ll have different scores with different companies) but most credit bureaus use the FICO system.
FICO is an acronym for the credit score calculating software offered by Fair Isaac Corporation Company. They developed the credit score model used by many in the financial industry and is still considered one of the leaders in the field today.
In fact, credit scores are sometimes called FICO scores or FICO ratings, although it’s important to understand that your score may be tabulated using different softwares.
The math used by the software is based on research and comparative mathematics. In simple terms, your credit score is, in a way, calculated on the same principles as your insurance premiums.
For example, your insurance company will likely ask you questions about your health, and your lifestyle choices, (such as whether you are a smoker), because these bits of information can tell the insurance company how much of a risk you are and how likely you are to make large claims later on.
Similarly, credit bureaus and lenders often look at general patterns. For example, based on research, people with too many debts tend NOT to have great rates of repayment. So your credit score may suffer if you have too many debts.
Here’s how it works:
Credit bureaus are privately held billion dollar companies… not government agencies. They use information from their client’s companies, (e.g. credit card companies and utility companies), to put together your credit report.
Once a file is begun on you (i.e. once you open a bank account or have bills to pay) then information about you is stored on the record. If you’re late paying a bill, the client inform the credit bureaus and they note this on your record.
Any unpaid bills, overdue bills or any such problem count as “dings” on your credit report and affect your score.
The type of debt you have, how much debt you have, how regularly you pay your bills, and all your other credit accounts are information used to calculate your credit score.
Knowledge is power…
Understanding how your credit score works will help you improve and maintain your credit score.
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Until next time…..
Althea
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