Credit Score Basics

I would like to thank all the members who have contacted me through the Ask Gene blog about financial issues and situations that are important to you. Recently, I have had several discussions about credit scores. As the economic situation in our country continues with uncertainty and legislative changes and restrictions to lending are pending, folks are concerned about how this all will impact their credit score. In fact, a recent Associated Press article noted that more than 25% of all Americans now have a credit score of 599 or less. With your credit score affecting everything from your mortgage loan to the cost of your auto insurance policy, more folks are paying attention to this important number now more than ever before.

For the next several blogs, I'd like to give you some basic facts about credit scoring that highlight its importance to your financial health, gathered from several sources, including vendors, the web, and years of experience in the industry. Put simply; credit scoring is a system of statistically analyzing credit reports that provides a simple three-digit score comparing an individual's past and current credit performance to that of similar consumers. Your credit score provides lenders, or other potential creditors such as insurance companies or landlords, a quick, fairly objective way to assess your creditworthiness or likely ability to pay back a loan or mortgage or pay the rent. Knowing your credit score (along with regularly checking your credit report) is a smart thing to do.

So, what is a credit score?

A credit score is often called a FICO score, after the Fair Isaac Corporation, which developed the most widely used analytical system and software. It may also be called a credit rating. Although individual credit bureaus or credit reporting agencies (CRAs) adapt, add to, or modify Fair Isaac models to suit their needs and provide their own credit score, most use the FICO score or system as a foundation.

Equifax, Experian, and TransUnion, are the three big CRAs. In 2006, these three developed a new credit scoring method called VantageScore, a competitor to the established FICO score. Although the VantageScore is now available to consumers as well as lenders, the FICO score is still the predominant and standard scoring system used and what I will reference in these blogs.

Why do lenders use credit scores?

one of the major reasons is that it's quick! But as the Federal Trade Commission (FTC) points out, credit scoring is based on a wide pool of actual data and statistics of persons using credit. As a result, most experts consider it more reliable than "subjective or judgmental methods." It's a way of leveling the playing field, if you will, for lenders or potential creditors to evaluate your creditworthiness.

What's a good number?

Generally, the higher your credit score, the better. Most credit scores, based on the FICO model, have a range of approximately 350-850. The best scores, indicating high creditworthiness, are from the mid 700s and higher. At Rogue, members with a credit score of 730 or above get our very best rates. Credit scores below 620 are considered poor. Most people fall in the 600s and 700s. Different lenders will give various scores different weights, but typically scoring 680 or above puts you in the category of an average or better credit risk.

I hope that this information and the links I have provided have been helpful. In the next blog, I'd like to continue discussing credit scores, the contributing factors taken into account when creating the score and how you can obtain your score.