Your credit score is a numerical representation of the credit risk you pose to lenders. The higher the score, the less risk that you will default on a loan. Lenders use your credit score in conjunction with your credit report to determine whether to give you a loan. Your credit score also determines your interest rate; people with high scores typically get lower interest rates because lenders consider them more credit-worthy.
Fair Isaac Corporation Credit Score
In the 1960s, the Fair Isaac Corporation revolutionized the credit-scoring industry with its credit risk scoring service, now known as the FICO credit score. The three credit bureaus use software developed by Fair Isaac to generate a FICO credit score. FICO scores consider the information contained in your credit report; each bureau's credit report might be different, so you might have three different FICO credit scores. Experian's score is also known as the Experian/Fair Isaac Risk Model; Equifax's is called the BEACON score; and Transunion's is the EMPIRICA score.
VantageScore
The three credit bureaus jointly developed their own credit scoring system, VantageScore, which launched in 2006. Like the FICO scores, VantageScore utilizes your credit report to calculate your credit score, so you may have a different result for each credit bureau. Each bureau might also provide an independent credit score. In addition, some lenders use their own algorithm to evaluate a customer's credit risk.
Factors Used to Determine Your Credit Score
Every credit-scoring system uses the same basic information to determine your credit score, with different weight given to the various categories. Federal law prohibits credit-scoring companies from using your race, gender, religion, marital status or national origin when calculating your score. The key factors in your credit score, which come from your credit report, include your payment history, length of credit, account balances, types of loans, credit utilization, and recent loans or inquiries. While the methods of calculating credit scores vary by company, in general a long history of paying your credit on time, keeping your balances low compared to your available credit, and having both credit cards and installment loans will lead to higher credit scores.
Obtaining Your Credit Score
Many companies offer your credit score for a fee, including Fair Isaac and the three credit bureaus. Sometimes you can obtain a free credit report with a trial of a credit-monitoring service. If you cancel the service within the trial period, you will not be charged. Legislation effective January 1, 2011, requires lenders to provide you with your credit score in some situation. If a lender provides different terms based on the customer's credit report or score, the lender must either inform customers who don't receive the best terms of that fact or provide them with the credit score used to determine their terms.
What Your Credit Score Means
In addition to having a different score from different credit providers, your credit score can vary from day to day as your balances change and age. Fair Isaac recommends checking your credit score six to 12 months before applying for a large loan, so that you can take steps to raise your score if necessary. A higher score often means you will get a higher loan amount or lower interest rate, which generally means you will pay less over the life of the loan.
Credit scores fall within a range of numbers, which vary by the scoring company. FICO credit scores range from 300 to 850, while the VantageScore range is from 501 to 990. For both systems, a higher score means a lower credit risk. Lenders do not rely solely on your credit score when evaluating your credit worthiness, but it can provide a general idea of where you fall on the scale of responsible credit use.
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