While your credit report says a lot about your financial history, many lenders prefer to use your credit score to determine whether to offer you a loan or credit, and how much interest to charge you. Your credit score is a number you’re assigned by a credit reporting agency (CRA) that reflects its assessment of the risk you pose to a potential creditor. One example is the FICO® score, calculated using methodology developed by a company called FairIsaac.
Your credit score is based on your credit report and depends on five main criteria:
Your payment
history
The total balance you owe
How
long you’ve used credit
The amount of new credit you have
The type of credit you use
Your FICO® score can range from 300 to 850. The top 20% of credit reports in this system receive scores over 780, while the lowest 20% receive scores under 620. The ranges vary slightly from CRA to CRA, as each may calculate its scores using different methodologies.
Lenders like to use credit scores because they reduce a lot of complex data to a single number. Each lender sets its own standard for what qualifies as an acceptable score, and determines the interest rate you qualify for based on your score. The best — or lowest — rates go to applicants with the highest scores. Applicants with lower scores, sometimes called sub-prime borrowers, may be offered credit at higher rates.
The pros and cons of credit scores
Credit scoring has its advocates and critics. Those in favor say that using a number to evaluate a potential applicant not only speeds the application process, but also eliminates the possibility of discrimination based on race, ethnicity, sex, age, or other potential biases. Detractors say that reducing all the information in your credit history to a single score can create a distorted picture that doesn’t accurately reflect your circumstances.
Ordering your credit score
Unlike your credit report, which all U.S. consumers are able
to order annually for free, you’ll have to
pay a modest fee to receive a copy of your credit score.
While it is unlikely that your credit score will tell a different story from your credit report, it may be useful to review your score from time to time to see how a particular CRA evaluates your creditworthiness. This is especially the case if you anticipate applying for a major loan, such as a mortgage, in the near future. As with credit reports, most experts recommend ordering your credit score directly from one of the major credit bureaus, rather than from another service that offers them. But in checking your credit score, you may decide to contact just one CRA, not all three, as they are likely to be similar.
