What to Know About Your Credit Score
It is important for every consumer to understand just what a credit score is, and how it is arrived at. Credit scoring uses statistical modeling in order to assess the credit worthiness of each individual, based on that individual’s personal credit history and current level of debt. This credit scoring model was first developed during the 1950s, and its use has steadily increased in the past twenty years or so.
During the early 1980s, the three major credit reporting agencies, Equifax, Experian and TransUnion all worked alongside the Fair Isaac company in order to develop a generic credit scoring model which was based only on the contents of an individual’s credit report.
Mortgage lenders and other lenders routinely look at the credit score, also referred to commonly as the FICO score, from one of the three credit reporting agencies. The lenders then use this information, in conjunction with other information, such as salary, to arrive at a lending decision.
While each of the three credit reporting agencies has its own way to compile credit scores, the scoring models have been standardized so that the numerical score at one agency is equivalent to the same number at another.
This number is arrived at by using information from the credit report, including how much is owed and whether required payments have been made on time. That score is then compared to the credit performance of those consumers who have similar profiles. The credit scoring system gives points for each factor which helps to predict those who are most likely to repay their debts on time.
Credit scores can range anywhere from 375 to 900 points, and those numbers get their meaning from the context in which they are used by lenders. For instance, lenders generally consider those with FICO scores of 650 or higher the best credit risks. Those with credit scores above 650 generally find it quite easy to borrow the money they need at the best interest rates and most favorable terms.
The average credit score in the country falls between 620 and 650, and this score indicates good credit, but also signals lenders to look carefully at the potential borrower to assess credit risks before extending the loan. These average credit scores are generally rewarded with average interest rates. While these borrowers generally will not qualify for those eye popping interest rates, they generally will not be penalized with a very high rate either.
Those with credit scores below 620 may encounter difficulty getting the best interest rates, and they may be consider a higher credit risk by lenders.