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About Credit Scores

Last updated 25th Nov 2022
Disclosure

Unless someone's independently wealthy, a credit score is and important number and can determine their financial wellbeing. Scores are used by both lenders and creditors to predict if an individual is going to pay their bills in a timely manner; thereby influencing decisions to extend credit or approve a loan.

Credit Scoring

In this article, we're going to provide information on the credit reporting and scoring process. That discussion will also include information about credit rating agencies, and how these agencies go about calculating a score.

We're also going to help answer the question: "What is a good credit score?" We'll do this by providing statistics and trends on a national basis. Finally, we're going to provide insights into the ways consumers can improve their score.

Credit Reports and Credit Scores

Credit rating agencies, or credit bureaus, calculate scores based on historical payment patterns. Payments include monthly bills such as credit card and utility bills as well as loans. Much of the information used to calculate a credit score is found in a credit report. That's good news, because as a result of the Fair Credit Reporting Act, everyone is entitled to a free credit report annually.

While the accuracy of the information contained in a report is extremely important to understand, a score is not typically contained in this document. In fact, consumers are not entitled to receive a free credit score, only their report. Consumers wishing to obtain their scores will have to pay one of the credit agencies a nominal fee of around $15.

FICO Credit Scores

The most common score used by lenders and creditors today is the FICO® score developed by Fair Isaac. Each of the three credit bureaus calculates their own proprietary version of the FICO score. Those scores are sold to lenders and creditors that want to understand the risk of nonpayment they are taking before deciding to lend someone money or waive a deposit.

The names used by each of the credit bureaus include:

Credit BureauFICO ScoreEquifaxBEACON®ExperianExperian / Fair Isaac Risk ModelTransUnionEMPIRICA®

Calculating a FICO Credit Score

A consumer's score is calculated separately by each of the three credit rating agencies based on information reported to them by utilities, credit card issuers, phone companies, and other creditors and lenders. The components used in the calculation of a FICO score includes:

FICO VantageScore Comparison

Increasing Credit Scores

We're going to finish up by talking about ways to improve a credit score. Individuals that had trouble paying bills in the past, or would like to increase their score can take the following steps:

  • Pay Bills on Time: mail checks or send electronic payments before their due dates. A chronic pattern of sending in payments late will lower a credit score over the long haul.
  • Decrease Debt: if at all possible, payoff loans or outstanding credit balances; doing so will help raise scores.
  • Decrease Outstanding Credit: while owning a large number of credit cards or opening up multiple lines of credit can make people feel more financially secure, this habit lowers their scores.
  • Stop Applying for New Credit: only apply for credit when it's really needed; recent applications for new credit will lower a score in the short term.

Credit Repair Services

There is only one legitimate action an individual can take to repair their credit score: Get a free online credit report, and make sure it's accurate.

Individuals with poor credit scores oftentimes look to companies offering repair services for help. It's important to understand the only legal way to increase a score is by the means mentioned above, fixing mistakes appearing on a report.


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Moneyzine Editor

Moneyzine Editor