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Credit Basics : What is a credit score?

Now that you know what credit is... what's all this about a credit score?

A credit score is a number that reflects your credit risk level. Your credit score helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due.

So... how is that score determined?

Your credit score is generated through statistical models using elements from your credit report – such as bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts.

Your score is not physically stored as part of your credit history on the credit file. Rather, it is typically generated at the time a lender requests your credit report, and is then included with the report viewed by the creditors. Your credit score is a fluid number, and it changes as the elements in your credit report change. For example, payment updates or a new account could cause your score to fluctuate.

There are many different credit scores used in the financial service industry. Your score may be different from lender to lender (or from car loan to mortgage loan) depending on the type of credit scoring model that was used. T he score most commonly used by lenders is known as a FICO because of its origins with Fair Isaac and Company . Fair Isaac is an independent company that came up with the scoring method and software used by banks and lenders, insurers and other businesses. Each of the three major credit bureaus (Experian, Equifax and TransUnion) worked with Fair Isaac in the early 1980's to come up with the scoring method.

The three national credit bureaus each have their own version of the FICO score with their own names. Equifax has the Beacon system, TransUnion has the Empirica system, and Experian has the Experian/Fair Isaac system. Each is based on the original Fair Isaac FICO scoring method and produces equivalent numerical results for any given credit report. Some lenders also have their own scoring methods. Other scoring methods may include information such as your income or how long you've been at the same job.

Okay, let's move on to the next step... let's find out about credit reports...

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