Definition of a Credit Score

A credit score determines a great deal about whether or not you qualify for a large loan, such as a mortgage or vehicle loan. It tells the lender whether or not you are a good credit risk, if you will likely pay the loaned money back, and if you will care for the property you want to purchase.

While everyone knows that there is a number called a credit score, many are unaware of what a credit score is, how it is calculated and what each type of credit score means.

There are three types of credit score to address today. The first is the most commonly used score, the FICO score.

The FICO score is named after the company that developed the algorithm for the score, the Fair Isaac & Company. Since this company began evaluating credit risk in the 1950s, many lenders have used it widely as a solid way to evaluate the credit risk of a borrower.

Although the neither Fair Isaac or the credit bureaus who rely heavily on the score will reveal exactly how it is calculated, it is well known that certain factors strongly affect the strength of the FICO score, including the following:

· Late payments

· The length of time a person has had a line of credit

· The ratio of credit used vs. amount of credit available (the lower the ratio, the better – don’t max out on credit cards)

· The length of time a person lives in a residence

· Negative credit reports – bankruptcies, charge offs or any other arrangement where the creditor did not receive full payment from the debtor.

The three credit bureaus (TransUnion, Equifax and Experian) each calculate this score separately and come up with unique numbers, although they are generally similar. They do, however, have different names.

For example, the credit score developed by Equifax in conjunction with Fair Isaac is known as the Beacon Score. This score ranges from 300 to 850, and the higher score is more desirable.

Similarly, the Empirica score is the score used by TransUnion. This number ranges from 150 to 934, again, with the higher numbers being preferred.

Experian uses the Fair Isaac score as their standard. This score ranges from 330 to 830.

With any of these credit scores, the company subscribes to the initial algorithms from Fair Isaac & Company, then adds their own version of the FICO score, which yields the different scales.

The best single thing a borrower can do to improve these scores is to pay bills on time.