What's a Credit Score?
A credit score is properly defined as 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 mostly based on credit report information, typically sourced from credit bureaus.
This is really just a very wordy way of saying that a credit score is what helps lenders decide how likely it is that you'll default on financial obligations. If you're trying to get a loan, you're borrowing money from a business. To the business, you're a potential investment and the business wants to know if you're worth it. The higher the score, the less likely it is that you'll miss your payments.
The score used to be hidden from consumers, only lenders and businesses that use the score could access it. However, in 2001, due to pressure from Congress and consumer groups, the rules were changed and you're now able to view your personal score. Checking with your score does come with a fee though; also checking it can affect the score itself.
How is your Credit Score determined?
There are different methods for calculating scores, but the most widely-used in the United States is the FICO. The FICO (Fair Isaac Corporation) provides consulting services and decision management systems, and is responsible for creating a measurement of credit risk. FICO credit scores range from 300-850. A score below 600 is considered high risk, with 620 being the dividing line between good and bad. 650 is average, and above 690 or 720 is considered excellent.
Here is a percentage breakdown of an FICO score:
- 35% - Payment History
- 30% - Debt Ratio
- 15% - Length of Credit History
- 10% - Types of Credit
- 10% - Number of Credit Inquiries
What's a Credit Score used for?
Credit scores are used for a ton of important things like buying a car, a house, a computer, or even getting a student loan. A few numbers can be the difference between obtaining something you want or need.
There's a lot to know about your credit, but I'm here to help! Over the next few days (and here and there throughout the next year), I'll be telling you what you need to know about credit. Tomorrow, we're going to be talking about what makes your credit score go up or down...so stay tuned!