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Credit Score

Credit score is measured and numerically presented information of a person’s credit history, for which a wide set of attributes is taken into consideration. In the US, it’s expressed by a three-digit number and three main agencies collect the data and prepare credit scores. Indicators in their calculations differ slightly, but might be united into big groups which are similar to each other. Credit scores are widely used by different organization to evaluate their potential applicant’s ability to meet financial obligations, it’s mainly exploited by banks and credit unions to decide whether it’s safe to extend a credit for an applicant or determine terms and conditions for a certain case.

Credit Score Main Principles

In the US, a credit score typically varies in the range between 300 and 850 points, with 850 being the best measure, while 300 indicates a critically poor credit score. A credit score higher than 650 is generally considered to be a good. 

The higher the score, the more likely a person is financially literate, responsible, and it’s safer for an organization to provide such a person with a credit. So, a better credit score means better credit conditions, i.g. lower interest rates, more convenient repayment periods and other bonuses. In other words, a lower interest rate for a credit implies less money spent on the loan repayment, so it’s literally more lucrative for anyone to maintain a good credit score. At the same time, a poor credit history might negatively affect a person’s life, resulting in a total credit denial, or, alternatively, in rather strict conditions which the credit issuer sets to protect itself against possible losses linked with an evident possibility of an applier’s failure to repay the debt completely and punctually. 

Aside from banks and credit unions, credit scores are also often used by landlords, who choose potential tenants, utility companies, cable providers, and employers who search for responsible workers. Specialized credit scores, in which additional indicators are considered, are sometimes prepared for some businesses and organizations which use credit scores for decision-making.

Main US Credit Score systems and credit bureaus

As credit scores are critically important for many finance-related organizations, the demand for their calculation and update is strong. There are several systems of gathering and evaluating credit data, with the most common being the FICO credit score system, created by the end of the 1980s by Fair Isaac Corporation. FICO prepares various credit scores according to the needs of multiple financial organizations, using different indicators from consumers’ credit reports to provide credible information for each type of credit score. Another important company, that generates credit score models, is VantageScore, though it isn’t as widely used as FICO scores.

While FICO Scores and VantageScore provide models for calculating credit scores, scores themselves, as well as the needed data, are collected and produced be credit bureaus. For the US, there are three biggest credit bureaus which monitor consumers’ credit histories, gather the data and produce credit scores for different purposes. These bureaus are Equifax, Experian and TransUnion, each of which produce their own reports that might be different from one another.

What makes up a Credit Score

Although different systems working under varying principles are used for calculating credit scores, there still are main big groups of indicators that are taken into consideration by all systems and all credit bureaus, as they capture the core data of a consumer’s credit behavior.

These indicators are the following:

  • credit history, reflecting the regularity of debt repayments and the punctuality of a consumer;
  • total amount of the available debt that is currently owed, also called credit utilization;
  • total length of a person’s credit history, with a longer history being evaluated as a safer one;
  • new credit accounts, their number and amounts;
  • types of credit, noting what loans a consumer has ever had;

Altogether, those indicators are evaluated using different algorithms for different cases, presented numerically and summed up in a three-digit number, which is a credit score.

Ways to improve a Credit Score

It has been stated that a credit score directly affects a lender’s decision on extending a credit or denying the application. So, if an individual in need of a credit gets a denial or inconvenient credit conditions, the cause of this is usually a poor credit score. But a credit score is not an unchangeable constant, and it is frequently updated with the new data, so it’s possible to improve it with competent management. 

The easiest way to make it better is just paying the bills in time. Several months of proper timely payments might raise a credit score if there are no serious misdoings recorded in the credit history.

Another possible solution is extending a credit limit of credit cards that are already in use, but not using it. It enlarges the total amount available for a credit, but reduces the amount which is currently owed, which has a positive effect on the credit score. It’s also important not to close credit cards if they aren’t used anymore. Doing so might harm the credit score.

If no methods bring the desired results, it might be reasonable to apply for a service of special credit repair organizations, that will negotiate to banks, credit unions or a credit score organization on your behalf to solve some problems.

It’s important to note, though, that any changes might take a long time to affect a credit history. Organizations submit the information to the credit bureaus with different regularity, and it also takes time to evaluate and take the data into account, so improving of a credit score might take months. An easier way is to monitor your credit score regularly to be aware of its current measure and be responsible with your debt repayments, regardless of its significance or insignificance for today.

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