By John Campbell
For better or for worse, credit scores often make a huge impact on our lives and our personal financial situations. As a matter of fact, your credit score may be the most important number you’ll ever see.
The credit scoring system that plays such an important role in our lives today was originally created by Fair Isaac & Co. in the late ‘50s. Since 1956, Fair Isaac has worked to improve business decisioning through increasingly sophisticated data management and analysis. With the company’s FICO score, Fair Isaac has devised a complex system of scoring models and mathematical formulas that assign you a single credit score that is used to gauge your future credit performance. Your score represents the lump sum of your total credit history to date. Of course, the better the score the less risky you’ll seem to potential lenders who will want some assurance that you’ll be able to repay any debts accrued.
Today, the exact formula for computing credit scores is a closely guarded secret kept by the three national credit bureaus - Equifax, Experian and TransUnion. Each of the bureaus use their own scoring variations, all based off of information provided by Fair Isaac. The Equifax credit score is known as the Beacon score, Experian’s score is known as the Experian/Fair Isaac Risk Model and TransUnion’s score is known as the Empirica score.
No two credit scores are usually the same, although most will deviate no more than 10 - 20 points from the others. Although the process of credit scoring is somewhat shrouded in mystery, five different factors continue to play an important role in the determination of your exact credit score. Roughly 35 percent of your credit score will be determined by your payment history, with 30 percent determined by your overall debt, 15 percent by the length of time you’ve had open credit accounts and 20 percent by new credit accounts and the types of credit you have. When making a determination of whether or not to open a line of credit for you, lenders may rely on just one of the three credit bureau scores or choose your median score to make their decision.
Credit scores typically range anywhere from 300 - 850 points. If your score is anywhere between 300 - 619 your credit will be considered poor. You’ll have a very hard time getting approved for any credit with a score in this range. If your score is 620 - 659 your credit will be considered fair. You may qualify for credit but won’t get the best deals or interest rates. If your score is 660 - 749 your credit will be considered good and you’ll likely be able to qualify for most lines of credit with decent interest rates. If your score is 750 or above you’ll be considered golden in the eyes of lenders. With such an excellent credit score, you’ll likely qualify for most lines of credit with exceptional rates and a minimum of hassle.
To ensure your own personal financial well being, you should aim for the highest credit score possible. Even if you don’t want any lines of credit and have no problem paying your bills on time, you’ll never know when you might need to use credit in the future. Try getting a mortgage without any credit history and you may find yourself locked out of the home of your dreams. Like it or not, credit scores play an important role in all our lives. What you do today to build your own credit scores may eventually have a huge impact on your financial stability. Use credit wisely and you’ll thank yourself for it in the future.
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John Campbell is the writer and editor of CashBuzz, A financial portal for the rest of us. Check out cashbuzz.com for the latest articles on money management and tips and tricks that can help improve your finances. This article may be reprinted on your Web site if the copyright, author information and active link are included.
