Credit score calculations
Your credit report is unique and, in some cases, quite lengthy. While it's a helpful tool for a potential lender, credit reports can take a long time to analyze. That can postpone a lending decision, which usually isn't good either for you or the lender. Credit scores were developed to help speed up the lending-decision process, as well as to help ensure credit reports are analyzed consistently.
A credit score assigns a number to your creditworthiness — based on your credit history. The calculations are complex and take into account a number of related factors. Typically, credit scores range from 300 to 850, though different companies use different scoring models and the ranges vary slightly. The better your credit history, the higher your credit score, and the more likely you are to be approved for credit or offered a favorable interest rate.
Your credit score is typically based on:
Whether you made payments on time — if you've been late with payments, your score will be lower
The total balance you owe compared to your available credit — the larger the balance, the lower your credit score
How long you've had a credit history — the longer your history, the better your score
How much new credit you have — a lot of new credit lines or even requests for credit, known as inquiries, can lower your score
The kinds of credit you have — lenders like to see experience with both revolving credit, such as credit cards, and installment debt such as auto loans or mortgages
Your payment history, or whether you make payments on time, weighs most heavily when your credit score is calculated. That's why it's so important to avoid making late payments. Even one or two slip-ups can lower your score.
FICO score
The term FICO is an acronym that stands for Fair Isaac Corporation. They're the company that first developed the complex calculation that assigns a numerical value to a potential borrower's credit risk. The three major credit bureaus may have their own name for this score, including Beacon® or Empirica®. Be sure you understand what score you are receiving, and how that compares to the FICO score.
Not just about money
Potential employers evaluating you for a position that requires a high degree of responsibility and organizational skills, or employers that require their employees to be bonded can also view your credit history. This means that a negative history might affect your chances of getting a job. Insurance companies, landlords and cell phone companies may also view your credit report, and might deny you services if your history isn't favorable.
