Credit Score

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What is a 'Credit Score'

A credit score is a statistical number that depicts a person's creditworthiness. Lenders use a credit score to evaluate the probability that a person repays his debts. Companies generate a credit score for each person with a Social Security number using data from the person's previous credit history. A credit score is a three-digit number ranging from 300 to 850, with 850 as the highest score that a borrower can achieve. The higher the score, the more financially trustworthy a person is considered to be.

BREAKING DOWN 'Credit Score'

The Fair Isaac Corporation, also known as FICO, created the standard credit score model for use by financial institutions, and a FICO score is the most commonly used credit scoring system as of 2016. There are other providers of credit-scoring systems, such as the insurance and mortgage industries. Consumers can possess high scores by maintaining a long history of paying their bills on time and keeping a low amount of debt.

A credit score plays a key role in a lender's decision to offer credit. For example, a borrower with a low score that is under 600 is not eligible to receive a prime mortgage loan and receives a referral to a subprime lender for a subprime mortgage, which offers a higher interest rate; however, a borrower with a high score of 700 or above is creditworthy and is eligible to receive a lower interest rate, which results in paying less money in interest over the life of the loan.

Score Factors

When information is updated on a borrower’s credit report, the borrower’s credit score changes based on whether he makes a payment or misses a payment.

The five main factors evaluated when calculating a credit score are payment history, total amount owed, length of credit history, types of credit and new credit. Payment history counts for 35% of a score and shows whether a person pays his obligations on time. Total amount owed counts for 30% of a score and shows the number of accounts a person has open and how much money he owes on each account. Length of credit history counts for 15% of a score and shows how long a person has had a credit history dating back to the first account opened.

Types of credit used counts for 10% of a score and shows if a person has a mix of installment credit, such as car loans or mortgage loans, and revolving credit, such as a credit cards. New credit counts for 10% of a score and shows if a person opens multiple new accounts at the same time.

Usually, six months' worth of on-time payment history provides enough data to generate a score. A person’s scores may also determine if a deposit is necessary and the amount necessary to obtain a cellphone, cable service or utilities or to rent an apartment. Lenders frequently review a borrower’s scores, especially when deciding to change a borrower’s interest rate or credit limit on a credit card.