Credit scores are a numerical representation of a consumers credit risk. The higher the score, the less risk a consumer presents. These scores are calculated using a statistical model that pulls credit information from a credit report. This information is then compared to the historical record of other borrowers and their repayment rates to determine an individuals credit risk.
Credit scores influence what credit is available to an individual and the terms of that credit (interest rate, credit limit, length of loan, etc). A credit score is usually a three digit number, often between the range of 300-850. Although a range of 150-950 is generally used for industry specific scores such as the insurance score or bankcard score.
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Types Of Credit Scores
A recent study showed that there could be over 1,000 individual scoring systems out there. Fortunately consumers don’t need to track 1,000+ scores, as creditors generally only look at the most popular scoring system which was developed by the Fair Isaac Corporation and called the FICO score (sometimes known as FICO classic score). This score is used in 90%+ of all lending decisions.
The other 10% of lending decisions usually use one of the other popular credit scores, namely VantageScore. FICO also introduced a new score in 2001 called the NextGen score, which failed to gain traction and is no longer used. All of the other scores are grouped into what is known as FAKO scores (fake + FICO = FAKO) which basically just means that these scores do not use the FICO model.
Free Credit Scores
- Find out how to access a FICO score for free
- Get a free TransUnion VantageScore through Credit Karma
What Information Is Used Calculating A Credit Score?
Credit scores are calculated by looking at the data found in a credit report. This includes the following:
- Payment history
- Length of credit history
- Credit utilization (total available credit / credit used)
- Types of credit used (revolving/installment)
- New accounts opened
For more information view “How Is A FICO Score Calculated“.
What Information Isn’t Used In Calculating A Credit Score?
The Equal Opportunity Credit Act (EOCA) prohibits credit descrimination based on any of the following attributes:
- Race
- Color
- Religion
- National origin
- Sex
- Marital status
- Age
- Because you get public assistance
Creditors are allowed to ask for this information, but they must not use it to aid in a credit decision (including using it to calculate a credit score).
Other Uses For Credit Scores
Credit scores aren’t only used by lenders, they are increasingly being used outside of the finance industry to determine risk and the responsibility of an individual.
Insurance Companies & Credit Scores
Insurance companies use credit scores to predict the chances of an individual filing an insurance claim and the amount of that claim. Insurance companies usually use an industry specific score called an insurance score to calculate this.
Employers & Credit Scores
Employers are increasingly using credit scores as part of their hiring process. The main reasoning being an individual who is unable to manage their credit is likely to struggle to manage their responsibilities in a work place.
Military & Credit Scores
The military is the most well known employer now looking at credit history as part of the hiring process. According to creditcards.com the Air Force will denied applicants with a debt to income ratio of above 40%. Bankruptcies, foreclosures and late payments are also taken into consideration.
The coast guard has even harsher restrictions, not allowing a debt to income ratio above 30% – which has caused over 25% of applicants that would’ve otherwise been eligible to be ineligible to serve.
The Navy, Army & Marine Corps also run credit checks – but they only do this on personnel that need security clearance and even then it’s looked at on a case by case basis.
Why the military gives a crap about the credit scores of 17-19 year olds is mind boggling. There’s literally nothing more irrelevant to producing good soldiers, sailors and marines than a f-ing FICO 8.
Credit card makes transaction easy. Thanks for info.
My credit score has dropped 42 points. Yikes. Is there a way to bounce back from this? Thank you
What caused the drop? If you have made payments on time, try to make payments before the statements come out if you can. One time, I made a big purchase, close to 40% of the credit card utilization. The score dropped 30 points right after the statement came out. If you opened too many credit cards recently, you just have to wait for the credit age to increase and inquiries to drop.
Yes
my friend got 40% off and brought the airpod pro today with the deal price $194, the final cost is only $144 before tax!
I find the Credit Scoring system so frustrating and illogical! I learned that even though I pay off my credit card in full each month it will pull when it is at it’s highest and treat it as long term debt. So I paid the next month before the prior date and they changed the pull date. So now I’m paying it off every other day. I have 3 cards, two are zero and one has only $115 on it mid month and I was decreased for that amount out of $20k limit.
so frustrated
I had a credit score that wasn’t updating for a solid 31 days. why?
> the last time it got pulled was the 31st of the previous month
> and it wouldn’t update for me at all within the month until it was the last day, aka the 31st.(why? idk duck me thats why)
In those 31 days, I had a report that showed me with a unpaid balance on a credit card. 7 days before the report was pulled, I had purchased with the credit card because it was a new BANK month.(you know because that’s a thing.) I don’t let interest hit, so I pay it off before the bank’s time of the month on checking for a balance. I paid off the credit card on the first of the calendar month.(weeks before the end of that current bank month) The balance was paid off for a solid 31 days before I saw it change to a higher score for being debt free. realistically, the credit report was pulled on 2 seperate months, even if you observe both the bank and calendar. I do not know when they wish to pull my report or when I need to have it pulled. It was like they wanted to show that I keep a balance every month… keeping a balance on a card takes too much planning.
paying off the card within a 3 day window is the most beneficial. though I wouldn’t count on that report being pulled when you want it too. this is organized anarchy.
Hi,
I want to contribute a guest post onto your site. Do you accept publications from India?
I have a credit card that gives your credit score and the reasons for it. The reasons are false. It says I have 12 open accounts (untrue). I have too many applications for credit (untrue). I have serious delinquency accounts (untrue). I have 3 credit cards all paid in full every month and a personal loan always paid early. I went thru a chapter 13 bankruptcy in 2010 and have been steadily rebuilding my credit. I fear someone else is using my ss # to open these accounts and then failed to pay them. My other credit card Discover always has a much higher score. What could be the problem?
I almost always pay all my bills completely (which is not required like with AMEX – every month and on time. My credit score only decreases about 10 points and bounces back up. The only time I saw my credit score jump upwards is when I had paid my rent with my credit card.
After I shared the FICO score increase with the manager, he started requiring that we PAY in order to PAY for our rent.
I am so happy I will be moving soon. Just thought I’d share.
Have you written about how sign ups affect your credit score? And how long it takes to recover from sign ups? I’m interested to know this.
Sign ups???
What the hell os a sign up?
I think he means “signing up” for a new credit card.