Credit Scores
What is a credit score?
A credit score is a three-digit summary of both the positive and negative information contained on your credit report. It's a rating system that indicates your financial responsibility and is used to predict risk and probability of loan repayment. A high credit score indicates that you are more likely to pay your loans back on time whereas a low credit score may indicate greater risk to creditors. Credit scores are a snapshot that will change over time as financial behavior changes.
Why is a credit score important?
Credit scores are used by credit card companies, banks, lenders, and even employers for various reasons. As far as financial institutions are concerned, credit scores are used to gauge what kind of borrower you are and to determine the likelihood of you paying back your loans.
In terms of employment, employers might use your credit score to gain insight into how responsible you are, you would have to sign a consent, and the inquiry will show up on your credit report. In some regulated financial industries and in fiscal roles requiring state or federal licensing employers may require credit checks. This makes it incredibly important to manage your credit wisely. Credit reports available to employers do not contain all the information found on credit reports issued to lenders in order to discourage discrimination.
How is a credit score calculated?
A credit score is generated by a mathematical algorithm which derives information from your credit report. There are different types of credit scores but the most widely used score in the United States is the FICO score, which is produced from software developed by Fair Isaac and Company.
What makes up your credit score?
There are five weighted factors that comprise your FICO score:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- New credit (10%)
- Types of credit in use (10%)
The Credit Scoring System
As mentioned before there are different types of credit scores. The commonly used FICO score range is from 300 to 850. Vantage Scores (a scoring model created as a joint venture by Experian, Equifax and TransUnion) also use the same range, from 300-850. In addition, each of the three consumer monitoring agencies have proprietary scoring models:
- Equifax: "Equifax Credit Score" ranges from 280-850
- Experian: "Experian Plus Score" ranges from 330-830
- TransUnion: "TransRisk New Account Score" ranges from 300-850
Regardless of the type of score, the higher your score the better. Below is an approximate breakdown of FICO scores and credit ratings.
How do I get my credit score?
While you can obtain your annual credit report for free from each of the consumer reporting agencies, you typically have to pay for credit scores. You can purchase your credit score through several channels. One option is to to purchase your score directly from one of the three credit reporting agencies: Equifax, Experian, TransUnion. When purchased through one of these agencies, you are typically purchasing an educational score.
When you subscribe to a credit monitoring service, the service usually gives you access to educational credit scores.
FICO scores derived from Equifax and TransUnion credit reports can be purchased from FICO's consumer website, myfico.com.