'Credit Score' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Credit Score refers to a number generated by the credit bureaus to represent the creditworthiness of an individual. The credit bureaus possess literally from hundreds to thousands of distinct lines worth of information on each person with a credit profile. This makes it extremely difficult for lending institutions to go through it all. Since they lack the man hours to carefully peruse each applicant’s credit reports personally, the majority of financial institutions which lend money employ these credit scores rather than tediously read through credit reports on applicants.
These Credit Scores are actually numbers that a computer program generates after crawling through an individual’s credit report. Such programs seek out certain fundamentals, patterns, and so-called warning flags in any credit report and history. They then generate a credit score based on what they find. Lenders love these scores since they can be basically interpreted by a consistent set of comparative rules.
Consider the following examples. Lending institutions might automatically approve any application that comes with an associated 720 credit score or higher. Those profiles with 650 to 720 would likely be approved but with a greater interest rate. Applications with credit scores below 650 might simply be rejected. The computer is consistent and fair using these standards, so no one is treated in a discriminatory way relative to any other applicant.
Federal laws require that each individual be granted a free credit report annually from every one of the big three credit bureaus Experian, Trans Union, and Equifax. This does not mean that anyone is required to hand out free credit scores. In fact there is no such thing as a truly free credit score offer. There are scores provided in exchange for signing up for trial membership services in things like credit monitoring services. In general though, individuals pay for their credit scores from each of the major credit bureaus.
The particulars of a Credit Score are interesting. It is always a three digit formatted number that ranges from 300 to 850. These become created using one of a variety of mathematical algorithms that work off of both the individuals’ credit profiles and their credit report’s particular information. This score is crafted with the intention of predicting risk to the lenders, not to benefit the person it covers. It is particularly concerned with the chances of an individual going delinquent on any credit obligations within the next 24 months after the score has been issued.
It is a common misnomer among many individuals that there is only one credit scoring model in the country. There are countless models that exist. It is only the FICO credit score that matters in nearly all cases though. This is because fully 90 percent of financial institutions within the United States rely on FICO credit scores in making their decisions on to whom they will extend credit and at what interest rate.
The higher the FICO score these algorithms generate, the lower the risk is to the various lenders. What makes matters more confusing is that there is not only one FICO credit score in existence for every adult American. Each of the three major bureaus generates its own particular score. Since 2009, consumers are only able to view two of their credit scores, those from both Trans Union and Equifax. This is because Experian chose to terminate its myFICO.com arrangements in 2009. Experian does not share their proprietary credit scores with consumers any longer.
Five different significant categories make up the FICO Credit Score. These are payment history (35 percent of the total component), Amounts owed (30 percent), length of credit history (15 percent), types of credit used (10 percent), and new credit inquiries and accounts opened (10 percent).