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Credit Score Explained

The credit score is a summary of a consumer’s creditworthiness. Also called the FICO score, it was developed by the Fair Isaac Co. The Californian firm created a system by which different indicators can be used cumulatively to express the risk posed by a borrower. Created to distill all information on your credit report, the FICO score serves as an index to the lender when they review your credit file. The index gives a single value once the formula has been used to calculate your credit. This gives the lenders fast and accurate prediction of the risk posed when giving the loan. To the lender, the FICO score streamlines the process of underwriting a loan. On the customer’s side, an opportunity for gaining credit is opened up since they can now check on their scores and improve them appropriately.


Scores range from 300 to 900 with the most falling between 600 and 700. As is the case, the higher score gives you a better chance of closing on a loan deal. A number of factors are used in determining the high scores. The most important ones however are used for gauging your background when applying for credit lines. Delinquency is defined as a borrowers conduct when repaying the loan. If your payments were overstayed then you are labeled a delinquent borrower. The number of delinquent payments featured in your past will probably project how you will handle your loans in future. Another factor is the use to which the credit is put. With one who has the tendency to max out on their credit card debt, there is every chance that they are gearing up for a higher credit line to support their impulsive nature. The age of your credit file also affects your credit index.


It is assumed that people who have held their credit for a long time are unlikely to pose a major risk. Also, the number of times one has applied for extra credit shows how you manage your portfolio. The FICO system runs a negative on borrowers who initiate several requests on their credit loans. Otherwise figured as one who needs frequent bursts of credit on a short term, such a customer poses a great risk. The variation of credit instruments in your credit portfolio may also be used to qualify/disqualify your case. With a combination of installments, you are unlikely to carry large risk since you make regular payments to sustain your credit lines. You therefore have access to free money.


The type of loan you want to adopt may view your score in a distinct manner. Different lenders consider distinct factors when considering the borrowers application. The Freddie Mac standards mark an ‘acceptable’ value as one where the index is at FICO 660. For this the customer’s files are given a basic review. ‘Uncertainty’ comes with a score between 620 and 660. With this, a thorough review of the entire credit history is conducted on the customer’s credit records. Below 620, a ‘high risk’ is presented by the consumer.

Tags: check, credit, loan, money, risk

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