A mathematical formula used by nearly every lender determines whether you receive a loan for a house or car. The use of credit scoring models are a recent development in the financial world. Today, almost every lender uses the same closely guarded scoring model, although the general parameters are available to the public.
History
Before the 1970s and 1980s, credit scoring models were non-existent, according the Public Broadcasting Service. Instead, lenders and loan officers had to use personal judgment, such as a person's appearance, job and street address when assessing a loan application. Human judgment cannot reliably ascertain credit risk as well as a mathematical model based on verified data.
The FICO Score
The most widely used credit score model was developed by the Fair Isaac Corporation. The actual FICO is one of the biggest secrets in business, but the Fair Isaac Corporations offers a general idea of its make up. You payment history, such as late and on time payments, make up 35 percent of the score. The amount owed, which includes the number of accounts, makes up 30 percent. How long you have had credit, any new credit accounts and the variety of accounts make up the remaining 35 percent, according to FICO.
Meaning
When calculating your score, a credit scoring model compares your financial data to the past performance of people with similar histories. Your credit score is a standardized result that determines the likelihood of you defaulting or being late on a loan payment, according to Lending Tree. The higher your score, the more likely you will repay your lender.
Considerations
The score you receive from a credit reporting agency is not necessarily the one a lender sees, but merely an approximation, according to MSN Money Central. Also, the credit reporting agencies have "secret" scores that the public cannot see. A bankruptcy scores calculates the chances of you going bankrupt and the transaction score estimates the odds of a fraudulent transaction.
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