Credit Score

Consumer access to credit, housing, insurance, basic utility services, and even employment is increasingly determined by centralized records of credit history and automated interpretations of those records.

What is a credit score?

Credit score is a number grade reflecting your credit hostory at a particular point in time. Lenders use credit scores to speed up the loan review process and to reduce the cost of examining your creddit information.

Computer-based credit scoring models produce numerical credit scores that function as a shorthand version of an applicant’s credit history to facilitate quick credit assessments. Credit scoring also gives lenders an unabiased method of evaluating your credit history.

The credit score has not simply been used to decide whether or not to extend credit, but has also been used to set prices and terms for mortgages and other consumer credit. In certain cases, even very small
differences in scores can result in substantially higher interest rates, and less favorable loan terms on new loans. Credit scores are also used to determine the cost of private mortgage insurance, which protects the lender, not the consumer, from loss but is required on mortgages with down payments of less than twenty percent. Lenders also review credit histories and/or credit scores to evaluate existing credit accounts, and use the information when deciding to change credit limits, interest rates, or other terms on those accounts.

How does the credit scoring system work?

The complex system for reporting and reviewing credit involves a large number of participants who fall generally into one of six categories: consumers; data repositories; data users; data furnishers; credit reporting agencies; and analytical service providers.

Approximately 190-200 million consumers have credit reports maintained by the three major credit repositories (Experian, Equifax, and Trans Union). Data users include lenders, insurers, landlords, utility companies, and employers, who review the credit information in consumers’ credit reports to make decisions about extending and pricing credit, offering and pricing insurance policies, and providing utility services, rental housing, or offers of employment. Some, but not all, data users are also data furnishers,
and regularly report information about consumers’ accounts to the credit repositories, who add the information to consumers’ credit reports.

FICO score is the most widely used credit score

These days the most widely used measurement for credit scoring is produced by Fair, Isaac and Co. and is commonly referred to as the FICO score.

A FICO credit score can range from 300 to 850. A borrower’s high FICO score is the best signal to the lender of how well you’ll make your mortgage payments. Although lenders interpret credit scores differently, they usually reserve the best interest rates for borrowers with solid credit, or scores of about 720 or higher. Borrowers with scores in the low 600s, on the other hand, are considered risky investments and warrant higher rates.

For more information on FICO score, see the FICO Score page.

Important facts about credit scores

• Credit cores reflect only one’s own past credit history, not personal characteristics such as
  age and gender. Over time consumers have the ability to control these scores.
  
  
• A low score could not only cost you up to thousands of dollars a year in additional finance charges, but also deny you access to credit, insurance, electric and telephone service, a rental unit, and even a job.
  
  
• Consumers with scores below 600 are typically charged relatively high, subprime loan rates, while those with scores above 700 are usually charged relatively low rates, and those with scores above 760 are charged the lowest rates.
  
  
• The most effective steps one can take to improve one's score are to: Pay your bills consistently and on time. If you have missed payments, get current and stay current. Don’t max-out your credit cards or other "revolving credit". Pay off debt rather than moving it around and don’t open many new accounts rapidly. And, check your credit report to make sure it is error-free.
  
  
• One can purchase one's credit scores (and reports) from all three credit bureaus for by contacting Fair Isaac (myFICO), or individual reports and scores from the three bureaus -- Equifax , Experian and TransUnion.