Credit Score – What is it?

Before I tell you what a credit score is, I think it is appropriate that you know what a credit is first. Credit can be defined as:

reputation of solvency and probity, entitling a person to be trusted in buying or borrowing

In other words, your credit or credit score is an indication of how responsible you are in handling debts.

And this behavior is being converted into a score, which ranges between 300 and 850, and that score gives lenders an idea of how well you’ve been handling your debts. The higher your credit score is, the better. Generally, scores in the low 600’s will give you a hard time in finding credit, while scores of 720 and above will give you the best interest rates out there.

The credit score is based on your credit report, which contains a history of your past debts and repayments. Credit bureaus use computers and mathematical calculations to arrive at a credit score from the information contained in your credit report.

Each credit bureau uses different methods to do this (which is why you will have different credit scores with different companies) but most credit bureaus use the FICO system. FICO is an acronym for the credit score calculating software offered by Fair Isaac Corporation. This is by far the most used software since the Fair Isaac Corporation developed the credit scoring model used by many in the financial industry and is still considered one of the leaders in the field.

Credit Bureaus, by the way, are the one’s who are computing and providing your credit score and credit report. They gather information from banks, financial institutions, utility companies, just to name a few. And the information they collected will then be converted into a score.

If you have any unpaid bills, overdue bills, late payments etc… these will count as “dings” in your credit report and will affect your score.

Credit Score – What is it?