What Is a Credit Score?

Most people know very little about credit, let alone what a credit score is or what it means.

In short, a credit score is a given three-digit number, ranging from as low as 150 to as high as 990 (depending on the credit score range) that represents your credit risk level, or risk of defaulting on a given loan.

With the advent of credit scores, banks and lenders were able to make credit decisions almost instantly and much more accurately, instead of relying on time-consuming underwriting that could take weeks.

The most common credit scoring system was developed by Fair Isaac Corp. as a means for banks and lenders to assess borrowers’ credit history quickly and easily to determine what interest rate and amount of credit they qualify for.

FICO Score the Most Common Credit Score

This credit scoring system is known as “FICO,” which is short for Fair Isaac Corp. and used by roughly 90% of banks in the United States. Keep in mind that there are other systems such as NextGen and VantageScore that have their own credit scoring systems as well.

Generally there are three main credit scores you should concern yourself under the FICO umbrella.

These credit scores are reported by the three major credit bureaus, including Equifax, Experian, and TransUnion.

Though you receive a separate credit score from each of these bureaus, it’s the mid-score that carries the most weight if all three are used. Banks and lenders use the middle score as the average because the credit bureaus report differently from time to time and a median score often serves as the best representation of your overall credit strength.

A credit score only takes into account your current and past credit accounts, usually going back as far as ten years. It includes credit cards, mortgages, tax liens, bankruptcies, foreclosures, collections, charge-offs, rental history, utilities, auto loans, and more.

Per the Equal Credit Opportunity Act, your score is not affected by marital status, religion, race, gender, or ethnicity. Under that same law, your credit score must be “empirically derived and statistically sound.” In other words, your credit score is data driven, and cannot be subjective. Income is also NOT a factor in credit scoring.

[What’s not in a FICO score?]

As alluded to earlier, a credit score is simply a representation of the data that makes up your credit history, used to statistically predict what you’ll do in the future. In a way, you could refer to it as a responsibility metric.

Credit scores don’t change very frequently or very much for the average person. On the Fair Isaac website they say, “…Your score probably won’t change a lot from one month to the next. In a given three-month time period, only about one in four people has a 20-point change in their FICO score.”

While this is generally true, frequent use of credit will lead to more frequent changes in your credit score, so take caution.

Credit scoring is determined by many factors including:

- past payment history
– amount of existing debt
– length of time credit established
– new credit inquiries
– types of credit established, credit mix

The makeup of the popular FICO score is derived from the following:

35% – past payment history
30% – outstanding debt, and proportion to available credit
15% – length of credit history (how long accounts have been established)
10% – type of credit accounts used (mortgage, auto, revolving, etc)
10% – amount and time since recent inquiries

Note that not all consumers have credit scores, usually due to an insufficient amount of credit data on file. But if you have at least one credit account, chances are you will have a credit score.

Keep in mind that the less credit history you have, the more unreliable your credit score. This has to do with the fact that light credit history can fluctuate greatly as any new credit is added to the equation, whereas deep credit history will be less affected by new activity.

Below is a graph from Fair isaac that displays the average FICO scores of Americans. This should give you a good idea as to where you stand credit wise.

Average FICO scores in the United States

Also check out my articles on good credit scores and excellent credit scores to get a better understanding of what it takes to maintain healthy credit.


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