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What Exactly Is a Credit Score, Anyway?

Real Estate Agent with Keller Williams Realty Cenla Partners

What Exactly Is a Credit Score? 

If you ask your neighbor, your friends or your banker what a credit score is, you're likely to get all kinds of answers.

-Your credit score is basically a number method used by banks/lenders to assess your ability and likelihood to pay back your debt.  Most refer to this as creditworthiness.

-Credit scores are based on multiple pieces of criteria, including your payment history (how often are you late on payments), amount of outstanding debt (how many items you have financed and make monthly pymts), length of credit history (how long you have had those items financed), use of new credit and types of credit used.

-Credit scores are based on credit report information, which is supplied to the companies by the Credit Bureau.

-Credit scores come from one or all of the three largest credit bureaus in the U.S. (Experian, Equifax and TransUnion).
 -Credit scores range between 300 and 990, depending on the scoring system and algorithms used (i.e., FICO, NextGen, CE Score and VantageScore).  300 being VERY low and 990 being VERY high!
Before there were credit scores, a man's word was the primary factor used to evaluate a borrower's credit worthiness and/or risk. This was very subjective and created a lot of variability in the results. Many lending institutions spent an enormous amount of resources training employees on how to observe consumer credit behavior as the basis for judging risk when lending money (Basically if you looked like you could repay the debt, you got the loan). Not only was this a slow process, but due to human error, it was also inconsistent and unreliable.

It was not until the 1980s that scores were standardized using a point system that scored the primary variables found on an individual's credit record. This newer system helped to eliminate much of the subjectivity and variability that had existed with other attempts at standardization.

However, this process was still connected to the spontaneous measurements of the consumer's credit report and did not consider the actual payment behaviors of a consumer.

Credit scoring took a major step forward when statistical models began using combinations of credit data. These next generation computer "predictability" models were designed to include payment information from thousands of consumers and were calculated based on a complex mathematical algorithm that generates a credit score the moment a report is ordered. There are literally trillions of score combinations used in the calculations. When combined with computer applications, scoring models have made the process of granting credit extremely efficient and much more objective. Although far from perfect, these models help facilitate commerce by expediting consumers' ability to get the credit they need in a far more efficient and effective manner than the systems previously used.