What is credit scoring?
Simply put, credit scoring is a method of assessing the credit risk of a loan applicant. Credit bureaus such as Experian, Equifax and Trans Union each developed mathematical scoring models that allowed them to offer a score based solely on the data of a single borrower. It evaluates a person’s credit worthiness based on their credit history and current credit accounts. This is commonly called your FICO score.
Creditors frequently use these scores when deciding who gets a loan and at what rate. However, your credit score is not the only criteria used by mortgage companies. They also consider your current salary and employment history when making loan decisions.
What’s in a score?
Credit scores are reported as a number, usually between 300 and 900. The higher the number, the better the score. Scores are calculated by reviewing the following data:
- Your history of late payments
- Current level of debt
- Types of credit accounts
- Length of credit history
- Number of credit inquiries
- History of applying for credit
- Bad credit behavior, such as writing bad checks
Personal details such as gender, race and religion are not considered when determining your score.
What’s a good score?
Overall, a score of 650 or above is a sign of good credit. People with scores of 650 or higher will, all things considered, have a good chance of obtaining quality loans at the best interest rates.
Scores of 620-650 indicates good credit, but also may point to potential trouble areas that creditors will want to look at and review. A lender may require additional documentation before a loan will be approved.
With scores below 620, homebuyers may find that they can still obtain a loan. However, the process will be lengthier and more involved, as creditors consider scores below this threshold to be an indicator of greater credit risk.
Where to find your score
Federal law requires the three major credit reporting agencies to provide you a free credit report once per year. While this report does not contain you FICO score, it does provide detailed information the credit companies use to come up with your score.