According to Wikipedia:

A credit score is a numerical expression, based on a level
analysis of a person’s files, to represent the creditworthiness
of an individual. A credit score is primarily based on a credit
report with information typically sourced from credit bureaus …
(all emphasis original)

Credit scores are widely used by lenders (banks, credit card companies, major retailers, etc.) to:

• Evaluate the potential risk posed by lending money to consumers
• Mitigate losses due to bad debt
• To determine who qualifies for a loan, at what interest rate, and what credit limits
• To determine which customers are likely to return the highest revenue
• To use the Credit Scoring system as an implementation of a trusted system

As regards consumer credit in general, the credit score is highly important – a “big deal”, if you will.

A person’s credit score can mean the difference between being denied or approved for credit, and a low or high rate of interest. A decent credit score can be a deciding factor as to whether or not a person is offered a lease… or a car loan.

A credit score is a three-digit number (from 300 to 850) that is generated by a mathematical algorithm (al-go-rithm noun: a procedure for solving a mathematical problem in a finite number of steps that frequently involves the repetition of an operation… Merriam-Webster).

According to the website Bankrate.com, the credit score “…is designed to predict risk, specifically, the likelihood that a debtor will become seriously delinquent on credit obligations in the 24-months after scoring.”

The number one credit-scoring model in the United States is the FICO credit score that was developed and implemented by the Fair Isaac and Company firm. Information posted on FICO.com claims that “90% of all financial institutions in the United States use FICO scores in their decision-making process.”

Typically, consumers have three credit scores, one each for the three major credit reporting bureaus in the United States. Those are: Experian, TransUnion, and Equifax. Since 2009, TransUnion and Equifax have only used FICO scoring – Experian ended its agreement with Fair Isaac and Company in that year.

Credit scores are made up of data taken from credit reports that are filtered in five major categories, as follows:

• Payment history – payment history on consumer credit accounts, including delinquencies and public records >Percentage of Total Score: thirty-five percent

• Amounts owed – amounts owed on consumer credit accounts (with total amount of “available credit” being used on “revolving accounts” being weighted heavily)>Percentage of Total Score: thirty percent

• Length of credit history – period of time since account opened & length of time since last account activity >Percentage of Total Score: fifteen percent

• Types of credit used – mix of accounts a consumer has (i.e. revolving, installment, etc.) >Percentage of Total Score: ten percent

• New credit – a consumer’s “pursuit of new credit” (including credit inquiries by potential lenders and newly opened accounts) >Percentage of Total Score: ten percent

A credit score is NOT affected by personal or demographic information such as age, race, marital status, income, or employment.

Federal law dictates that consumers have the right to obtain a free credit report every year from each of the three major reporting agencies noted above. The report is free – a consumer does not have the corresponding right to a free credit score. Some websites have free FICO-score “estimators”, but to get a free FICO score, the consumer must either purchase it or obtain it when approved for credit of some sort.

Picture Credit: Pixabay

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