The Evaluation of Credit Scores

A three-digit credit score evaluation is sometimes the only thing a lender needs to reject your application for credit or approve your for the lowest rate possible. A high credit score does not always mean the creditor wants you as a customer. Also, technically, there is no standard definition of what is good credit.

Credit Score Algorithms

Credit score algorithms evaluate your credit history based on how well you repay loans compared to people in a similar financial situation, not your ability to repay a debt. The most common scoring system in the U.S. -- the Fair Isaac risk model -- gives a score that predicts the chance you might miss a payment, but not whether you are a good borrower. Alternative scoring models might rank your creditworthiness. The VantageScore system, for instance, rates scores like grade school papers, such as an "A" for scores in the 901 to 990 range.

Lenders

Lenders are the last process in credit score evaluation and thus hold the ultimate power to decide if you are a good risk. As long as you have a score close to the average or above it, you can probably get a loan. A high credit score evaluation usually means you can receive a much lower rate. Scores above 700 are prime -- qualify for the top rates at most lenders -- and anything less tends to receive a rate adjustment -- increasing the prime rate. However, a high score does not guarantee a loan or a low rate, because lenders consider additional factors, such as monthly income, other debt and job history.

Rejection for Credit Reasons

When an evaluation for credit ends in a rejection, the lender must inform the consumer of the rejection, according to the Federal Trade Commission. This usually occurs with a letter stating the reason or an email if the consumer allows electronic communication. As of 2011, the Fair Credit Reporting Act requires any party to give a free credit report to the consumer if the party denies him a service or loan because of credit. Parties required to disclose rejection for a credit reason includes employers and landlords.

Tip

Evaluate your own credit. You do not have to purchase a score from the credit bureaus, as an online estimator can give you a close approximation to your actual FICO score. Lenders usually look for negative items, such as missed payments and collection accounts. Once negatives hit your report you can do little to remove them, but you can counteract their presence by adding as much positive payment history as possible and eliminating debt.