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Credit Scoring made simple

It is your right to know what credit scoring agencies have to say about you. Finding out this information doesn't cost a lot and takes only a few minutes.

So what is credit scoring?

Credit scoring is a method of assessing the credit risk of a loan applicant. It uses mathematical models to evaluate a person's credit worthiness based on his credit history and current credit accounts. The system was first developed in the 1950s, but has come into widespread use in just the last couple of decades.

In the early '80s, each of the three major credit bureaus (Experian, Equifax and Trans Union) developed scoring models that allowed them to offer a score based solely on the financial data of an individual. Creditors, especially those in the home mortgage industry, frequently use these scores while deciding on who will get the loan and at what rate. However, it's worth remembering that creditors also consider other information, such as your employment history, when making decisions regarding the loan.

What's in a score?

A Credit score is a number, usually in the range of 300-900. The higher the number, the better will be your credit score. A higher credit score indicates that an individual is capable of repaying the loan. Typically, scores are determined by reviewing the following data:

  • Your history of late payments
  • Non payments
  • Current level of debt
  • Types of credit accounts
  • Length of credit history
  • Number of credit inquiries
  • History of applying for credit
  • Bad credit behavior, such as writing bad checks

Personal details such as race, gender and religion are not considered while determining your score. Each major credit bureau has its own method for calculating credit scores. However, the scoring models have been fairly standardized so that a score of "600" at one bureau is roughly equivalent to the same score at another. Overall, a score of 650 or above is a sign of a very good credit and a very good credit score. People with scores of 650 or higher will, all things considered, have a good chance of obtaining quality loans at the best interest rates. Overall, a score of 650 or above is a sign of very good credit. People with scores of 650 or higher have good chances of obtaining quality loans at the best interest rates.


What's a good score?

Overall, a score of 650 or above is a sign of a very good credit and a very good credit score. People with scores of 650 or higher will, all things considered, have a good chance of obtaining quality loans at the best interest rates.
Scores of 620 to 650 indicate good credit, but also may point to potential trouble areas that creditors will want to look at and review. A lender may require additional documentation before a loan is approved.
With scores below 620, consumers may still obtain a loan. However, getting a loan in such cases will be tough, as creditors consider scores below this value to be an indication of greater credit risk.