Understanding Credit Score

No matter what type of credit you are applying for; whether it be for a car, a credit card, or even a mortgage, lenders want to ensure that you are a good credit risk. The following will help you understand your credit score.

FICO(R) scores (named after the company that created the concept, Fair Isaac Corporation) are used by lenders and others to assess the credit risk of prospective borrowers or existing customers, in order to help make credit and marketing decisions. These scores are derived solely from the information available on credit bureau reports.

Everyone has three FICO scores, one for each of the three credit bureaus: Experian, TransUnion, and Equifax, and each score is based on information the credit bureau keeps on file about you. Whenever you apply for credit, payoff a loan, or are late for a payment, the information that makes up your FICO scores is affected and your FICO score is updated.

To understand your credit score, your 3 FICO scores affect both how much and what loan terms (interest rate, etc.) lenders will offer you at any given time. Taking steps to improve your FICO scores can help you qualify for better rates from lenders.

FICO scores provide the best guide to understanding your credit score they offer lenders the potential for future risk based solely on credit report data. The higher the credit score, the lower the risk. But no score says whether a specific individual will be a "good" or "bad" customer. And while many lenders use FICO scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product. There is no single "cutoff score" used by all lenders and there are many additional factors that lenders use to determine your actual interest rates.

FICO scores have different names at each of the credit reporting agencies. All of these scores, however, are developed using the same methods by Fair Isaac, and have been rigorously tested to ensure they provide the most accurate picture of credit risk possible using credit report data. In general, when people talk about "your score", they're talking about your current FICO score. However, there is no one credit score used to make decisions about you.