What is a Credit Score and Credit Score Formula

Credit Score and Credit Scoring

About The Credit Score

A credit score is a computer-generated number that tells a lender how likely you are to repay your debts. Depending on the credit scoring system, the scores can range from 300 to 900 — The higher the number, the more likely you are to be deemed creditworthy. A credit score is calculated by analyzing all the pieces of information in your credit record and summarizing them into a number.

Your credit score is important! It will be used – along with your credit report and other information from your loan application – to determine your creditworthiness and what type of interest rate you will receive. One of the best ways to ensure a top notch credit score is through regular review of your credit report. Get a complete 3-in-1 Credit Report here.

Credit Scoring

credit score chart
Credit score chart for bad, poor, fair, good and excellent credit scores

Creditors have been using credit scoring as a fast, objective way to evaluate a credit report for more than 30 years. The most commonly used credit score is known as a “FICO” score. The “FICO” score was developed by Fair, Isaac & Co., the largest vendor of scoring systems.

Your credit score is determined by scanning your credit history and running mathematical computations on the records. The result is a score that lenders use to predict the likelihood of repayment.

Factors that are used in a scoring model include:

  • Payment history.
  • The amount of credit to which you have access.
  • The amount of credit you are currently using.
  • The length of your credit history.
  • Recent requests for credit.

Under the Equal Credit Opportunity Act, a credit scoring system may not use certain characteristics such as race, sex, marital status, national origin, or religion as factors to determine the score.

Credit scoring benefits you by allowing for speedy, objective analysis of your credit history. If you have a good credit score, you can be approved for a loan almost instantly–something unheard of before credit scoring.

Credit Scoring 101

Don’t worry, This “Credit Score 101” article doesn’t require any prerequisite courses, but you’ll want to be ready to learn about a few tricky algorithms and number crunching. Grab your #2 pencil and let’s get started!

  • History –

    The credit scoring system became prevalent during the 1980’s as a way for lenders to quickly evaluate a potential borrower’s creditworthiness. The system was found to accurately predict financial risk over time and grew to several different industries. Now credit scores are used by lenders, insurers, landlords, employers, utility companies and even judges to evaluate your credit behavior.

  • Algebra –

    Thousands of different credit scoring formulas exist today for various evaluation purposes. Each unique credit scoring system is accurate and correct for its own application. The credit scores you can order online use an algorithm created for consumers that approximates these different formulas. Your online credit score may vary a bit from the score your lender uses, but they should be in the same range.

  • Chemistry –

    The basic credit score formula takes into account several factors from your credit report. The impact of each element fluctuates based on your own credit profile:

    • Payment history – A good record of on-time payments will help boost your credit score.
    • Outstanding debt – Balances above 50 percent of your credit limits will harm your credit. Aim for balances under 30 percent.
    • Credit account history – An established credit history makes you a less risky borrower. Think twice before closing old accounts before a loan application.
    • Recent inquiries – When a lender or business checks your credit, it causes a hard inquiry and a slight ding to your credit score. Apply for new credit in moderation.
    • Types of credit – A healthy credit profile has a balanced mix of credit accounts and loans.
  • Economics –

    When you are preparing for a major purchase make sure you check your credit scores and credit reports from all three credit bureaus: TransUnion, Equifax and Experian. Looking at your scores and reports a few months before your loan application will help you get a complete picture of your credit health. Worried if your credit score makes the grade? If your credit score is above 650 you will probably qualify for a standard loan. Under 650, you may have trouble receiving new credit.

    If your credit score is a little low, pay your bills on time, reduce your debt, remove inaccuracies and avoid new inquiries for a few months to give it a boost. Plus, don’t forget that your credit score is not the only factor a lender may look at when they are evaluating your financial standing. Click here to see your 3-in-1 Credit Report PLUS all three of your credit scores.

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