Facts About Credit Scores

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Facts About Credit Scores
Facts About Credit Scores (Image: Photo by: Woodsy)

A credit score, also known as a FICO score, is a system used by lenders to make lending decisions. Whether you are applying for a mortgage, car loan, student loan or credit card, lenders will want to know your credit score. Higher scores imply lower risks, while lower scores imply higher risks. Credit score calculations are based on your credit history, such as if your bills are paid on time and the amount of open credit you have.

History

Bill Fair and Earl Isaac founded the Fair Isaac Corporation in 1956 and introduced the Fair Isaac FICO score in 1981. FICO scores are calculated by a software program developed by Fair Isaac.

Function

FICO credit scores are managed by the three credit bureaus: Experian, TransUnion and Equifax. Each person will have three credit scores, one for each bureau.

Effects

The FICO credit scores are used by lenders to determine a person's creditworthiness. Using this information a lender then decides the how likely the borrower is to stay current on payments, which credit terms to offer, which interest rate to use, and how much risk will be involved.

Considerations

One must have open lines of credit reported to a credit bureau to have a credit score. As reported information changes, the bureaus will update your credit score.

Calculations

Credit scores are calculated by the Fair Issac software using a proprietary formula. However, these approximate values can be used as a guide. 35% Payment History, 30% Amounts Owed, 15% Length of Credit History, 10% Types of Credit Used and 10% New Credit.

Misconceptions

Not all creditors report to all three credit bureaus. Each bureau may have a different score, depending on the information the agency has.

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