What is a Credit Score?

These days, it seems like everybody is talking about credit reports and credit scores. Online, on television, even on the radio, all you hear about is making sure to check your credit score to see if it’s good or bad. But there are many people who aren’t even sure what they’re supposed to be checking, or how to tell if it’s in the good area, or the bad. All they know is that every service company seems to need to know this little, three-digit number before any financial relationship can be formed.

First of all, it is true that many companies will want to know your credit score, and they’re not all banks. Utility providers, phone companies, landlords, and government departments often insist on knowing a credit score before giving quotes or granting approvals. Now, there are some organizations that will lend money without requesting a credit report. For instance, short term cash loan lenders, such as the network of participating lenders used by MoneyMutual.com, will often approve a cash advance of this type without checking your credit score. But as long as so many other organizations need to know, you need to be as informed as possible.

A credit score consists of a three-digit number. Basically, it is a numerical expression of a person’s creditworthiness. Based on a statistical analysis of all available credit files, it’s purpose is to tell financial institutions the potential risk posed by lending money to a consumer. It tells the likelihood that this person will pay their bills. The corresponding credit report consists of compiled information attained from credit bureaus, and contains details of the individual’s past borrowing and repayment as well as any late payments or bankruptcy.

There are different methods of calculating credit scores; however, the most used type was developed by the public company FICO. The FICO system uses a risk-based algorithm that studies the possibility that the potential borrower will default on their financial obligations to the lender. In the United States, it is used by many mortgage lenders before approving home loans. VantageScore is another that is commonly used in the United States. Credit bureaus tend to have their own credit scoring systems, and many larger lenders, such as credit card issuers, have recently developed their own models as well.

The number scales also differ between systems. The VantageScore credit score ranges from 501 to 990, while the FICO range is from 300 to 850. Either way, the closer the consumer is to the top of the range, the less risky of a borrower they are. And therefore, they are likely to receive more credit and financing privileges.