What is credit scoring?
Credit scoring is a method used by lenders to help decide whether or not you are a good candidate for a loan. The scoring system:
- Compares information in your credit report to the performance of consumers who have similar credit characteristics
- Examines many credit characteristics, including your payment history, the number and kind of accounts you have, the number and frequency of late payments, and any collections or bankruptcies
Generally speaking, positive credit characteristics make your score higher and help you to qualify for better loans. Negative characteristics make your score lower and may interfere with your ability to quality for the best loan terms.
How is a credit-scoring model developed?
A credit-scoring model is developed by using several criteria, including:
- Selecting a large sampling of customers
- Analyzing the data in their credit reports to determine which factors relate to creditworthiness
- Assigning a degree of importance to each of the factors, based on how accurate a predictor it is in determining who will repay their loan on time
What is a "good" credit score?
There are several types of credit scores available. Typically, the higher the score, the better. Each lender decides what credit score range it considers to be a good credit risk or a poor credit risk. For this reason, the lender is the best source to explain what your credit score means in relation to the final credit decision. After all, they determine the criteria used to extend credit. The credit score is only one component of information evaluated by lenders.
What factors influence my credit score?
Various factors determine your credit score, including the following:
- Payment history
- Outstanding debt
- Length of credit history
- Severity and frequency of derogatory credit information such as bankruptcies, charge-offs, and collections
- The amount of credit used compared to the credit available
How does my credit score affect me?
Your credit score is an important indicator of your financial health. Lenders use credit scores to determine:
- Whether or not you are a good candidate for a loan
- What type of interest rate you will pay
While your credit score is a key determinant of your creditworthiness, lenders also examine the information on your credit report and your loan application. Regularly checking your credit report enables you to:
- Be informed of the most up-to-date information in your credit history
- Correct any inaccuracies, to make sure that your credit data is a true depiction of your credit record and increasing your chances of receiving credit under the best possible terms
Why does my FICO score change from time to time?
The credit bureaus calculate your FICO score based on the information contained in your credit file. As your credit history changes, your FICO score will also change. In addition, we sometimes obtain information from different credit bureaus at different times (for example, we may obtain your score from one bureau when your account is opened and from a different bureau to review your account later on). The information in your files at the various credit bureaus may vary because some creditors report information only to certain credit bureaus and not to others.
When do FICO scores update?
As a general rule, FICO credit scores are updated on a monthly basis for the preceding month and should be available to view after the first of the month. The score provided is based on the information in your credit report for the previous month.
It is also important to note that your score may be different at each of the three main credit reporting agencies. The FICO score from each credit reporting agency considers only the data in your credit report at that agency. If your current scores from the three credit reporting agencies are different, it's probably because the information those agencies have on you differs.
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