A personal credit score represents how likely you are to default on future loans, based on your financial history. The most widely used personal credit score is the FICO score, which is calculated using an algorithm from the Fair Isaac Corp.
Function
Credit bureaus collect information about how you have handled debts in the past from financial institutions and then use this information to compute your credit score. Creditors look at your score as one measure of your creditworthiness when you apply for a loan.
Considerations
The FICO credit score weights five categories of information when calculating your score: your payment history (35 percent), your amounts borrowed (30 percent), your length of credit (15 percent), your mix of credit types used (10 percent) and how much credit you've applied for recently (10 percent).
Score Range
The FICO personal credit score scale runs from 300 to 850, with 850 representing perfect credit. According to the Motley Fool, an investing website, only about 1 percent of the population has perfect credit.
Significance
Creditors use your credit score to determine if you will be approved for a loan and how much interest you will pay. According to Bankrate.com, a score of 740 or higher will qualify you for the preferred interest rates.
Benefits
Your personal credit score gives lenders an objective way to examine your credit history because your score remains unaffected by your employment history, age, marital status, gender or ethnicity.
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