Credit Scores

credit scoresCredit scores are a numerical representation of a consumers credit risk. The higher the score, the less risk a consumer presents. These scores are calculated using a statistical model that pulls credit information from a credit report. This information is then compared to the historical record of other borrowers and their repayment rates to determine an individuals credit risk.

Credit scores influence what credit is available to an individual and the terms of that credit (interest rate, credit limit, length of loan, etc). A credit score is usually a three digit number, often between the range of 300-850. Although a range of 150-950 is generally used for industry specific scores such as the insurance score or bankcard score.

Types Of Credit Scores

A recent study showed that there could be over 1,000 individual scoring systems out there. Fortunately consumers don’t need to track 1,000+ scores, as creditors generally only look at the most popular scoring system which was developed by the Fair Isaac Corporation and called the FICO score (sometimes known as FICO classic score). This score is used in 90%+ of all lending decisions.

The other 10% of lending decisions usually use one of the other popular credit scores, namely VantageScore. FICO also introduced a new score in 2001 called the NextGen score, which failed to gain traction and is no longer used. All of the other scores are grouped into what is known as FAKO scores (fake + FICO = FAKO) which basically just means that these scores do not use the FICO model.

Free Credit Scores

What Information Is Used Calculating A Credit Score?

Credit scores are calculated by looking at the data found in a credit report. This includes the following:

  • Payment history
  • Length of credit history
  • Credit utilization (total available credit / credit used)
  • Types of credit used (revolving/installment)
  • New accounts opened

For more information view “How Is A FICO Score Calculated“.

What Information Isn’t Used In Calculating A Credit Score?

The Equal Opportunity Credit Act (EOCA) prohibits credit descrimination based on any of the following attributes:

  • Race
  • Color
  • Religion
  • National origin
  • Sex
  • Marital status
  • Age
  • Because you get public assistance

Creditors are allowed to ask for this information, but they must not use it to aid in a credit decision (including using it to calculate a credit score).

Other Uses For Credit Scores

Credit scores aren’t only used by lenders, they are increasingly being used outside of the finance industry to determine risk and the responsibility of an individual.

Insurance Companies & Credit Scores

Insurance companies use credit scores to predict the chances of an individual filing an insurance claim and the amount of that claim. Insurance companies usually use an industry specific score called an insurance score to calculate this.

Employers & Credit Scores

Employers are increasingly using credit scores as part of their hiring process. The main reasoning being an individual who is unable to manage their credit is likely to struggle to manage their responsibilities in a work place.

Military & Credit Scores

The military is the most well known employer now looking at credit history as part of the hiring process. According to the Air Force will denied applicants with a debt to income ratio of above 40%. Bankruptcies, foreclosures and late payments are also taken into consideration.

The coast guard has even harsher restrictions, not allowing a debt to income ratio above 30% – which has caused over 25% of applicants that would’ve otherwise been eligible to be ineligible to serve.

The Navy, Army & Marine Corps also run credit checks – but they only do this on personnel that need security clearance and even then it’s looked at on a case by case basis.

3 Responses to Credit Scores

  1. Matt says:

    Have you written about how sign ups affect your credit score? And how long it takes to recover from sign ups? I’m interested to know this.

  2. DD says:

    I almost always pay all my bills completely (which is not required like with AMEX – every month and on time. My credit score only decreases about 10 points and bounces back up. The only time I saw my credit score jump upwards is when I had paid my rent with my credit card.
    After I shared the FICO score increase with the manager, he started requiring that we PAY in order to PAY for our rent.
    I am so happy I will be moving soon. Just thought I’d share.

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