The credit score was created by the Fair Isaac Corporation, or FICO, at the request of financial institutions, such as banks, who wanted an easy way to gauge who was a good credit risk. The three major credit bureaus (Experian, TransUnion and Equifax) obtain your credit data on a regular basis from lenders and input it into the proprietary FICO algorithm.
Although the agencies use the same algorithm, they use agency-specific methodology regarding what information to apply when creating your FICO, or credit score. The FICO range of credit scores falls between 300 and 850. Financial institutions break this broad range into smaller categories. While every institution sets their own end points for each smaller credit score range, the ranges fall into five broad categories: Excellent, Good, Fair, Poor and Bad.
The question most people want to know is, what’s a good credit score? If we assign some sample numbers to the above categories then a good credit score would be anything over 700.
Keep in mind that the specific numbers listed here are merely examples and that the actual numbers vary between financial institutions. A good rule of thumb is that the higher your credit score range, the lower your interest rate.
A good credit score depends on the scoring system used by your lender. Different scoring systems use different scales, and different lenders use different systems. If you have a good credit score with Equifax, TransUnion, or Experian then you are likely to have a good score elsewhere.
The higher your score the less you are considered a risk to creditors, landlords, and prospective employers. A lower score can be caused by many different reasons such as a poor track record in paying loans, recent behavior of taking on more credit, or not enough time developing a sufficient credit record. With a high score on the credit scale you will receive very favorable terms and your likelihood of being denied credit is much lower.
Regardless of which credit score range your score falls, it is possible to improve your credit score. There are some steps that everyone can use when they want to raise their credit score,
Remember that the credit score range your credit score falls within is more important than your specific credit score number. If you are worried that your credit score falls too close to the edge of a range, it’s in your best interest to work to improve your score. Everyone can have excellent credit, even you.
Your credit score is one of the most important numbers in your life, but few people know where it comes from or what it means. Your score affects everything from the interest rate you pay on your car loan to how much you can borrow for a mortgage. It’s only three numbers long, but where your score falls on a credit score range can mean the difference between you getting a loan or not. If you have questions or need help with your score talk to EcoCredit.
Graphic source: Credit.org