A credit score, also referred to as a credit rating, is a numerical representation of an individual’s credit-worthiness, reflecting the credit-worthiness of that person. A credit score usually is based on detailed credit reports, usually sourced from several credit agencies. A credit score provides important information about a borrower’s borrowing habits and credit-reverage, and how those behaviors affect lenders and creditors. When someone applies for credit or for a loan, the lender will use a credit score to determine if the borrower is creditworthy and able to repay a loan, and if so, if a high credit score will help secure the funding.
There are three major credit score measurement systems: The FICO score system, the TRW ( Transaction Research Unit) credit scoring system, and the Equifax credit rating system. Each of these three systems measures different aspects of a borrower’s credit history. Lenders use all three systems to make their judgments about borrowers, including the amount they are willing to lend, the amount of risk they are willing to take, and the accuracy of that risk assessment. Because the credit reporting agencies publish their credit scores every six months, and because different types of accounts are scored differently, many consumers have questions about the meaning of their credit scores and about the various methods of gauging credit-worthiness. Here are some frequently asked questions about credit scores.
How do lenders determine my credit score? The FICO (the Fair Isaac & Company) credit scoring model is the most widely used by lenders nationwide. In this model, a borrower’s payment history and current debt load are considered as part of the factors that determine a borrower’s FICO score. Many people also refer to this type of scoring as a “hydro-systemic” approach to credit scoring, since it models the credit-worthiness of a consumer based upon information that is available in a number of different sources, including prior debts and level of available credit.
How are credit scoring models determined? The models are arrived at using a variety of different measurements. The most common is a geometric formula that factors in the number of credit accounts a borrower has, the length of those accounts, and the total amount of debt that is owed on those accounts. Other measurements may be utilized as well. Typically, however, the formula is developed using data from the credit reporting bureaus and is updated every six months for free. This gives anyone with an online banking account an idea of their score as it changes each time the bureau issues its updates.
How are these scores calculated? A good credit score will be somewhere between 620 and 850. However, these scores are not officially assigned; rather, they are “guessed” by the bureau. The best way to give yourself a better chance of qualifying for good rates is to raise your credit score slightly. There are many techniques for slightly adjusting your scores so you’ll have a better chance of qualifying.
What do creditors look at when evaluating your credit score and credit utilization rate? One of the first things that most creditors will look at is your credit limit. If you have a low credit limit, you’ll find it tougher to qualify for loans. Credit limits affect many loan qualification standards. However, your creditors won’t look at your credit limit if your credit score and utilization rate are high enough.