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How Your Credit Score is Created

How a Credit Score is Calculated

There are five main factors that are used to determine your credit score: your own personal payment history, any outstanding debts you have, how long you’ve been building up your credit history, any new lines of credit that you have recently opened, and the types of credit that you use most often.

Personal details like race and gender used to be taken into consideration when determining credit scores, but it’s important to know that these details should never be used by a credit bureau when calculating someone’s score. Only details that are indicative of your financial responsibility are taken into account when your score is created.

Understanding Your Credit Score

On the most basic level, a higher credit score is a good thing and a lower credit score is a bad thing. A lower score means that you probably have a shaky financial history, and that lenders will be taking a big risk if they choose to give you loans.

Each of the three credit bureaus has a different scale for calculating your personal score:

  • TransUnion: 300 - 850
  • Equifax: 300 - 850
  • Experian: 340 - 820

Because the scales are different and are calculated using different methods, it’s completely okay if you have different scores from each bureau. Analysts are still working to create a more uniform standard for computing scores, but in the meantime, most banks and lenders pay more attention to your FICO score than any other score.

What’s a FICO Score?

The acronym stands for Fair Isaac and Company, which is the company responsible for developing the software that computes the score. Each of the three credit bureaus uses a different software: TransUnion uses EMPIRICA, Equifax uses BEACON, and Experian either uses FICO or their own Experian Model. Each software has been developed using the FICO method as a foundation, and each program is regularly updated for accuracy.

What Is Considered To Be a “Good” Score?

As stated above, the higher your score, the better off you are. If your score is anywhere between 720 - 850, you’re considered a no-risk borrower, and you’re likely to get the best deals when you open a line of credit. A score between 620 - 719 is considered low-risk, meaning that your credit history might not be perfect, but you can still get good deals on loans. A score between 620 - 674 is considered moderate, and although it is considered a good score, you may not be able to get good deals on new lines of credit.

When your score drops below 620, that starts to indicate that lenders will be taking a risk if they choose to offer you loans. A number between 560 - 619 may make it difficult to qualify for a loan, and if you do qualify, you probably won’t be offered very good rates. A number below 560 signifies that you’re a high-risk borrower, and it’s not very likely that you’ll qualify for a loan at all. If a lender does agree to give you a loan, the interest rates will be extremely high and it will take a long time to pay off your debt.

In conclusion, you should always be striving to get your credit score as high as possible. Although any score above 620 is technically considered good, if you’re planning to take out a big line of credit in the future, you want your score to be at or above 720, in the no-risk range.

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