What Are the Meanings of Credit Scores?

Despite the fact that credit scores can help determine whether you get get a job or a mortgage, only about 3 in 10 Americans know what a credit score tells a lender, according to the Consumer Federation of America. Credit scores are a fast and effective means of determining your willingness to repay a debt rather than relying on subjective data, such as demographic information.

Identification

Credit scores offer a purely mathematical way to calculate the likelihood of a borrower missing a payment. A person with a score of 615 under the FICO system, for example, represents a 9 in 1 chance of defaulting on an account. By relying on verified financial data, credit scoring systems eliminate some of the bias and errors of informal credit underwriting.

Considerations

Lenders hold the right to determine your creditworthiness, so one lender can decide a score of 615 might expose it to too much risk, while another creditor might consider this good enough for a loan. Also, not all scores are alike and some models use a different range than the standard FICO model. A 615 on the FICO scale is an OK risk, but that same score is very bad under the VantageScore system.

Factors

The credit rating agencies only include factors in their credit score algorithm that have a correlation to real world lending statistics or an ability to verify data. A job and salary affect whether you can pay a loan, but this can be hard to verify, because some people have side income -- for example, money earned doing odd jobs such as mowing lawns -- that would take too much time to document.

Tip

Things you can do to increase your credit score, such as paying bills on time, reflect positively on your credit file and likely your credit score. If you need credit now, try shopping around several lenders to find one willing to give you the lowest rate for a student or auto loan or mortgage -- the credit scoring model allows you 45 days to apply for as many of these types of loans as needed and only counts the applications as a single inquiry. Each time you apply for a credit card your score drops a little, as the credit bureaus do not allow rate shopping for revolving loans.