Whenever you go in to a financial institution for getting a credit facility, let’s say a loan or an overdraft, what were the deciding factors for the institution? Your repayment capacity, age, assets in your possession? Among these factors, there is one most important thing that they look at; your credit score. In this article, we are trying to understand how credit score works.
Credit score is called in different names and calculated differently in different countries. Anyway, most of the countries have adopted the US way of calculating the credit score. Therefore, lets have a look at how the US credit score works. Although the calculation behind the credit score differs, the basics remain the same.
By credit score, a numerical value is assigned for person’s creditworthiness. For deriving numerical value, there are statistical formulas used for analyzing person’s credit files. If the credit score is high, it is interpreted as a high likelihood that the person who requires the credit facility will pay their bills. In the US, the credit score is based on the credit report information supplied by credit bureaus. There are three main credit bureaus in the US: Experian, TransUnion and Equifax. When it comes to the credit score calculation, these credit bureaus have their own credit scores: Experien’s PLUS score, TransUnion’s Credit Score and Equifax’s ScorePower.
The most famous credit score formula was developed by Fair Isaac Corporation and it is call FICO. This is the method used by most of the credit bureaus for calculating their credit score along with their unique factors calculated in. Americans are entitled for a free credit report every year from one of the main credit bureaus. These three credit bureaus run a web site called annualcreditreport.com (only accessible from the US) as a collective effort and users can get their credit report for free. But the catch is that the users are not given the credit score for free and it is only available as an additional service where a fee is involved. Usually the FICO credit score range is between 300 and 850.