What Is A Credit Score Rating?
What is a credit score rating? It is a predictive measurement of an individual borrower's credit stability. This number gives lending institutions a consistent and objective way to evaluate whether or not to extend credit.
The credit scoring system evaluates the patterns of hundreds of thousands of past credit reports to identify common variables, such as the probability of a person defaulting on a loan, or becoming over-extended.
By identifying consistent variables based on past credit history, the system can then predict future credit behavior.
Elements that determine your credit score
Using a mathematical formula, your credit score takes into consideration your credit history, how you've paid your bills, how much open credit you have, as well as other factors that predict your credit worthiness. The formula then compares your information to the credit performance of other consumers with similar profiles to produce a three-digit number.
Lenders use this three-digit number to determine whether or not to lend money, how much money to lend, and what interest rate will be charged.
How many credit scoring systems are there?
Your credit score may be different from lender to lender, depending on the credit scoring system that was used. Credit scoring systems all look at the details in your credit report. However, the systems look at the information slightly differently depending on what the score is being measured for, and where the comparative information is coming from.
There is also a difference between scores generated for lending purposes and education purposes. Most lenders use scores based on the FICO model. Consumers, on the other hand, will generally receive an educational scores. These types of credit scores are generated to help consumers understand their credit score and see where they stand before they apply for credit. While they may not be identical to what lenders see, they are close and can help you determine what you need to do to improve your score.
Below is a brief overview of the main credit scoring systems.
- FICO: The FICO credit score is provided by the Fair Isaac Corporation, which was founded in 1956. It is the most widely used credit scoring system, and is utilized in nearly three quarters of all mortgage lending decisions. My Fico, where individual can order their own credit scores, is the consumer division of the Fair Isaac Corporation.
- Beacon Credit Scoring System: A Beacon score is the Fair Isaac Corporation (FICO) credit score calculated using information from the Equifax credit bureau.
- Empirica Credit Scoring System: These credit scores are furnished by the Trans Union credit bureau, and are based on the FICO model using information from Trans Union credit files.
- Experian/Fair Isaac Risk Score: This credit scoring system was developed by the Experian Credit Bureau and is based on the FICO model, using Experian information.
- VantageScore: The Vantage Score System uses information from all three credit bureaus, but is able to use only one month of credit history to establish a credit score. It also give different weights to certain factors than the other scoring methods.
Many major companies use credit scores in conjunction with other factors when making decisions about extending credit. Now that you understand what a credit score rating is, we will discuss the different types of businesses that commonly use credit scores for decision-making.
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