A Short Explanation Of Credit Scores

Credit scores are calculated using a mathematical formula to assess an individual’s credit worthiness based on their credit history and current credit accounts. In the early 1980s the three major credit bureaus, Equifax, Experian and Trans Union all worked with the Fair, Isaac Company to develop scoring formulas that allow each bureau to offer a score based solely on the contents of the credit bureau’s data about an individual. Each credit bureau has its own formula, however, since the scoring models were all developed by the same company, the scores from all three bureaus are usually about the same if each credit bureau has the same data.

Creditors… frequently use these scores… as an important factor in deciding whether or not to offer credit.

Creditors, especially in the mortgage industry, frequently use these scores (known as FICO scores) as an important factor in deciding whether or not to offer credit. The scores range from 375 to 900 points, but those numbers mean little on their own. They become meaningful when you look at the lenders program guidelines and the minimum credit score required to qualify for each program. Under both retail credit and 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 indicate basically good credit and will get you retail credit, but mortgage lenders will look at the potential borrower to assess any particular credit risks before extending a large loan or high credit limit.

A score below 620 will still get you retail credit but can prevent a consumer from getting the best mortgage since they may be considered a greater credit risk–but it does not mean that they can’t get credit. The terms may be less appealing, but often credit can still be obtained.

A score below 560 makes it very difficult to get retail credit and mortgage rates, if the lender has a program for high risk borrowers, will be quite high. There are still alternatives, such as secured credit cards, but in most cases they will have high fees and may not give you the use of all of your money.

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