Credit Score Basics

The number one factor used by lenders and creditors to determine your level of credit worthiness is numerical summary of your credit history, or credit score.  A credit score may also be referred to as a FICO score, in reference to the Fair Isaac Corporation, which is the corporation responsible for the development of the system that determines credit scores now used by several companies. 

A very complicated mathematical formula determines your personal credit score based on your credit history.  The formula takes into account five key characteristics.  The characteristics include how you utilize your credit, the manner in which you make your monthly payments, the length of credit history, how many times you apply for credit, and the forms of credit that you utilize. 

A credit score may be as low as 300 or as high as 850.  The majority of credit scores are somewhere within the range of 600 to 800.  A higher credit score represents a higher level of credit worthiness to lenders.  

However, each type of lender will typically use different sections of your credit report and score to determine actual credit worthiness.  For example, when you apply for an auto loan, the lender will determine your credit worthiness from your debt-to-income ratio, down payment on the loan and credit score.  If you apply for any credit card, the lender will be more interested in your past credit card history.  Whereas, if you apply for a mortgage, your credit score determines if you qualify and the interest rate.     

The credit bureaus that maintain credit reports are Equifax, Experian, and TransUnion.  You may obtain a copy of your credit history and score from each of these companies for a fee.  It is always a good idea to know what’s in your credit history and score anytime you want to apply for credit before submitting an application to any lender for credit.