Your credit score, or FICO score, is a three-digit number that represents a statistical analysis of your creditworthiness. Your credit score is based on the information in your credit report, which is usually sourced from the three major credit bureaus. Using this score, lenders will determine the likelihood of your default on a loan, and whether you will make timely payments if they lend you money. The purpose of the three-digit score is to make that assessment easy to make, and understandable in comparison to the standing of other borrowers.
The information in your credit report reflects your bill-paying history and debt profile. If you are late on a payment by 30, 60, or 90 days, that will be noted in a credit report. If you default on a loan or a credit card, or if a bank has to “charge off” a debt that you incurred, those will be noted on the credit report as well. All of these factors will be analyzed when determining your three digit credit score.
Typically, the three major consumer credit reporting agencies – Experian, Equifax and Transunion – determine their own credit scores based on the information they have on file for you. The credit score that most lenders use is an average of the three, or whichever score is the middle one (one being the lowest and one the highest).
How do banks determine your credit score? The process is generally shrouded in mystery, but most people fall into one of the following broad categories. A score of 750-840 is generally considered “Excellent” credit. A score of 660-749 is considered “Good” credit. 620-659 is “average” credit. Anything below that is considered “Poor” credit, and probably indicates that you have a history of late payments or other black marks on your credit report, such as an outstanding loan or default.
Banks, credit cards and other lenders use credit scores to evaluate the potential risk of lending money to you. Your credit score determines whether or not you qualify for a loan, and at what rate of interest you can borrow. Having a good credit score means you get better rates, higher credit limits, and other benefits. It’s important to know your credit rating if you plan to apply for a home loan, car loan, or any other form of credit.