What is a Credit Score?

These days, it seems like everybody is talking about credit reports and credit scores. Online, on television, even on the radio, all you hear about is making sure to check your credit score to see if it’s good or bad. But there are many people who aren’t even sure what they’re supposed to be checking, or how to tell if it’s in the good area, or the bad. All they know is that every service company seems to need to know this little, three-digit number before any financial relationship can be formed.

First of all, it is true that many companies will want to know your credit score, and they’re not all banks. Utility providers, phone companies, landlords, and government departments often insist on knowing a credit score before giving quotes or granting approvals. Now, there are some organizations that will lend money without requesting a credit report. For instance, short term cash loan lenders, such as the network of participating lenders used by MoneyMutual.com, will often approve a cash advance of this type without checking your credit score. But as long as so many other organizations need to know, you need to be as informed as possible.

A credit score consists of a three-digit number. Basically, it is a numerical expression of a person’s creditworthiness. Based on a statistical analysis of all available credit files, it’s purpose is to tell financial institutions the potential risk posed by lending money to a consumer. It tells the likelihood that this person will pay their bills. The corresponding credit report consists of compiled information attained from credit bureaus, and contains details of the individual’s past borrowing and repayment as well as any late payments or bankruptcy.

There are different methods of calculating credit scores; however, the most used type was developed by the public company FICO. The FICO system uses a risk-based algorithm that studies the possibility that the potential borrower will default on their financial obligations to the lender. In the United States, it is used by many mortgage lenders before approving home loans. VantageScore is another that is commonly used in the United States. Credit bureaus tend to have their own credit scoring systems, and many larger lenders, such as credit card issuers, have recently developed their own models as well.

The number scales also differ between systems. The VantageScore credit score ranges from 501 to 990, while the FICO range is from 300 to 850. Either way, the closer the consumer is to the top of the range, the less risky of a borrower they are. And therefore, they are likely to receive more credit and financing privileges.

7 comments

  • Sean says:

    I’ll admit that I’ve been really lax about checking my credit score (mostly because it wasn’t that good) over the years, so this is news to me. I just recently submitted my info to refinance my mortgage, and my credit score came back pretty high, depending on which of these rating scores was used. Which is the most common rating system?

  • Warren says:

    My friend was griping today about his credit score – 511. He blames medical bills from his car accident a few years back, and I definitely agree that it's really tough to keep up with bills when you're in the hospital. He thinks that this will keep him from getting a house though – is that true?

  • Mr. Worthingtom says:

    Aside from just being different companies, is there any substantial difference between the two major credit scorekeepers? Should I be paying more attention to one than the other?

  • Lucas says:

    While it is good to know your score, every time someone checks your credit it goes down by two point.s That might not seem like a lot, but it can really add up. I went apartment shopping right out of college while I was also job searching, and between checking rentals, shopping for cars, and applying for credit cards, my score dropped almost 50 points seemingly overnight.

  • Michelle Dobranski says:

    I have a friend who has such bad credit that he can't even get a credit card. Hopefully this will change in the future.

  • Patty W says:

    This describes me perfectly. I am never sure what I should be checking when it comes to my credit. The only thing I found out recently before coming across this site was that you should never get several credit checks done at the same time.

  • April Madden says:

    Lucas, I can't believe that your credit dropped 50 points! That's insane. I do understand how a student can not be aware of these issues with credit, but they should be advised so that they dont end up with poor credit at the beginning of their lives.


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