What are Credit Scores?

Credit scoring is a statistical assessment of an individual's credit-worthiness based on their credit history and current credit accounts. Credit scoring was first developed in the 1950s, but has come into increasing use in just the last two decades.

The three major credit bureaus worked with the Fair, Isaac company to develop credit scoring models that allow each bureau to offer a score based solely on the contents of the credit bureau's data about an individual.

While each bureau has its own unique system, the scoring models have been normalized so that a numerical score at one bureau is the equivalent of the same numerical score at another. Thus, a score of 700 from Equifax indicates the same creditworthiness as a score of 700 from Trans Union or Experian, even though the calculations used to determine those scores are different at each bureau.

Creditors--especially in the mortgage industry--frequently use these scores, known as FICO scores, as an important factor in the decision whether or not to offer credit. The scores can range from 375 to 900 points.

Generally, you are likely to be considered a better credit risk if your FICO score is high. Under mortgage lending guidelines, for example, a score of 650 or above indicates a very good credit history. People with these scores will usually find obtaining credit quick and easy, and will have a good chance to get it on favorable terms.

Scores between 620 and 650 (average FICO scores fall into this range) indicate basically good credit, but suggest to lenders that they should look at the potential borrower to assess any particular credit risks before extending a large loan or high credit limit. People with scores in this range have a good chance at obtaining credit at a good rate, but may have to provide additional documentation and explanations to the lender before a large loan is approved. This means that their loan closing may take longer, making their experience more like that of borrowers in the days before credit scoring, when every individual was researched.

A score below 620 may prevent a borrower from getting the best interest rates, as they may be considered a greater credit risk--but it does not mean that they can't get credit. The process will probably be lengthier and, as noted, the terms may be less appealing, but usually credit can be obtained.