A credit score is also commonly known as a FICO score. The main rules for score determination were created by the Fair Isaac Corporation (FICO). There is more than one way to determine a credit score. However, the FICO method is the one most commonly used by lenders. The purpose of the credit score is to assess the risks in granting a loan. Get monthly credit scores and monitoring from a trusted provider. Compare plans here. https://www.smore.com/ytcu8-the-best-credit-monitoring-services
Credit Score Interpretation
In order to interpret a credit score, the first item is to determine the type of score used. FICO scores are used by Equifax and TransUnion with a lengthy history behind its use. The less popular "PLUS" scoring system is used by Experian. However, all three companies also use VantageScore, which is a competing system with FICO. Additionally, other scoring systems include: "Score X" from Experian and "TransRisk" from TransUnion. These are considered educational scores, which are not used for loan underwriting. Their purposes are to provide score calculation insight.
In the U.S., the range for FICO scoring is from 300 to 850. The median FICO score for Americans is 723. Scores that are below 600 are considered to be high risk borrowers. A score of 650 is considered an average credit-user, while above 690 is considered excellent. A credit score is based on outstanding debt, new credit, payments and credit currently used. The Experian PLUS credit scoring system has a range of 330 to 830. The VantageScore system has a range of 501 to 990.
How Credit Scores Are Calculated
Since the FICO score is a proprietary tool, the Fair Isaac Company doesn't indicate its exact calculation formula. However, it's known that the calculation is divided into five categories. These are: amount owed (30%), payment history (35%), new credit inquiries (10%), credit history length (15%) and credit type (10%).
How well prior debt obligations are met is illustrated in the payment history. Payment problems, such as bankruptcy, delinquencies and collection will also be shown in the payment history. Various considerations will be given to problem issues. These are: the amounts that were involved, the timeframe of resolution and when the problems occurred. The greater the number of problems, the lower the credit score.
The amount owed to lenders will focus on different items. These will include the owed amount, account types and the number of accounts. This will outline the current financial situation. An overall large amount of debt from different sources will adversely affect a credit score.
Other credit score categories are relatively straightforward. For example, the longer a good credit history is maintained, the better. A twenty-year history of on-time payments will be considered better than a two-year history. Too many applications for credit may indicate financial distress. Therefore, each credit application will lower the credit score slightly. Possession of a single credit card is considered less of a risk than multiple cards. In general, a large number of credit accounts will lead to a lower credit score.
Other Determining Factors
A credit score is based only on the items that are contained in the credit report. This means that there are other factors that might be considered by lenders. For example, the length of employment and current income are not reflected in a credit report. A lender will consider lengthy employment, with a good salary, a major factor when extending credit. Type of employment may also be considered. For example, a physician may be considered a better risk than a seasonal construction worker.
However, credit score are key tools for lending agencies. Therefore, it's important to review it and maintain it periodically. This can be done by checking one's credit report for any errors.
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