Understanding Credit Scores

Bankruptcy Scoring evaluated an individual’s risk of loaning money to. Loan officers used paper scorecards that had questions to ask to the borrower. The loan officer would check boxes. Then add up your score at the bottom of the scorecard. The score related to the likelihood of the borrower filing for bankruptcy.

Fair Isaac Company created a complex mathematical algorithm that uses 40 variables to analyzed credit files. Most of the time, the algorithm was amazingly accurate in predicting the risk of granting credit. In 1996, computerized credit scoring became the standard for approving loans. Fair Isaac scoring models are proprietary. The exact mathematical formula used to calculate credit scores gives them their competitive advantage.

FICO has industry specific scoring models. For instance, the mortgage industry uses a different FICO scoring model than the automobile industry. And creditors use the consumer scoring model, which is different from the mortgage and auto industry. FICO is the industry standard. They were not available to consumers until the late 90’s. They now can be purchased from FICO only.

Credit scores from any other website, such as credit monitoring services, are not calculated using FICO’s scoring models. They are good to use when you are trying to improve your credit score. Using it as a gauge to see if your credit score is moving up or down. Because you never know how close or how far away your actual credit score is. 

 

 

 

What is a credit score?

 Your credit score is a three-digit number between 300 and 850 that grades you on your credit worthiness – the likelihood that you’ll repay borrowed money. Your established patterns of credit and payment correspond to the likelihood that you will make your payments on time, “as agreed” in the future. They are calculated using only the information from your credit report.

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 Essentially, a credit score is the numeric summary of your credit report on the day your credit is pulled at that moment in time. The score changes as new information is added to or deleted from the credit file. It is not saved or reusable. It’s good for a one-time use. A higher score indicates better creditworthiness, which can lead to lower interest rates and better approval odds for loans or credit.

What impacts your credit score?

Here are the key factors:

1. Payment History (35%): Paying your bills on time is the most important factor. Late payments significantly lower your score.

2. Credit Utilization (30%): The amount of credit you’re using compared to your total credit limit. Lower utilization (ideally under 30%) is better.

3. Credit History Length (15%): Longer credit history generally boosts your score.

4. Credit Mix (10%): Having a mix of credit types—like credit cards, auto loans, and mortgages—can improve your score.

5. New Credit (10%): Opening several new accounts in a short time can lower your score because it suggests financial risk.

Credit score ranges

Here’s a general breakdown of FICO scores (a common scoring model):

• Poor: 300–579

• Fair: 580–669

• Good: 670–739

• Very Good: 740–799

• Exceptional: 800–850

Why do credit scores matter?

Lenders, landlords, and even employers may use your credit score to gauge your reliability. A strong score can mean lower interest rates, better loan terms, and easier access to financial opportunities.