Free Credit Score

Understanding Credit Scores

Your credit risk is summarized into a credit score, the number generated by your credit report as of a certain period or point in time. Lending companies evaluate your credit worthiness based on your credit score and use this credit report in evaluating your credit worthiness.

FICO create credit scores based on gathered information about your consumer credit activities. These are used by lenders to make their credit decisions about you. In the United States, there are three scores, all determined according to the information on file with the respective credit bureau. Your information changes with time as you enter and conclude your personal transactions, so your credit score will change accordingly.

Individuals have corresponding credit health ratings based on their credit scores. The credit and the terms that will be available to you will be greatly influenced by your credit health. Whether you apply for a mortgage, a car loan or a credit card, the lender will want to know the amount of risk they are taking by lending you money. Calculations of each of your 3 FICO scores will largely depend on three different credit reports with an account that has been in existence for a minimum of six months. Each of the report must include an updated account within the last six months because the FICO report needs to be generated from adequate recent information as the basis of the score.

Most of the credit scores used by credit bureaus are produced using the software developed by FICO or the Fair Isaac and Company which has been founded in 1956 in the United States. While the company provides FICO Scores by working with the credit reporting agencies, it does not involve itself in the determination whether the information in credit reports are accurate. The scores generated are provided by the credit bureaus to the lenders.

When the credit score of an individual is high, it means the lending companies consider his credit risk lower. The FICO scores serve as the guide to future risk but this is solely based on data from credit reports; it does not evaluate the individual attributes of a person with regards to his characteristics as a customer. Lenders who use the FICO scores combine it with other strategies for evaluating a person’s potential credit risk. Lenders use different “cutoff score” in granting credit and their policies are influenced by many other factors in their credit risk assessment.

There are different names for FICO scores used by the different credit reporting agencies, even though the development of the scores are arrived at through the use of the same methods. Equifax call their FICO Score the BEACON score while Experian call theirs the Experian/Fair Isaac Risk Model. TransUnion call their FICO Score the EMPIRICA.

FICO scores are generally the score used by most credit bureaus but it is not the sole credit bureau scores. Individuals may have a number of credit scores. Some lending companies use the FICO score in combination with their own credit scores and the individual’s personal information in determining the credit worthiness of a person.

Copyright 2011.