What is a credit score and how is it calculated?

Most of time credit score is refer as FICO score (Fair Isaac Corporation), it is a number based on the information in your credit file that shows how likely you are to pay a loan back on time, the higher your score, the less risky you are. You credit score is derived from three major credit bureaus: Exprian, Equifax and TransUnion. These 3 major credit bureaus will compile your credit report based on the information provided by the companies that gave your credit in the past. Based on the information such as your payment history, the length of your credit history and the type of credit your have and the amounts owed, the credit bureaus will generate your credit report. And based on your credit report, a number or scores will be assigned to you; this number will be range from 300 to 850. This magic number is your credit score, the higher the number the better you are.

Who sees your credit scores?

Until a few years ago, the short answer was: "Not you." Prior to 2001, FICO credit scores were not available to consumers at all. In fact, the credit bureaus contractually prohibited lenders from disclosing the scores to their applicants citing a potential lack of “context” behind any score disclosure. However, as consumers became more aware of the fact that someone other than their professors was grading them they pushed harder and harder for a peek behind the mysterious formula that was used to calculate their scores. So far, Fair Isaac has satisfied this demand to some degree by providing consumers with access to and an explanation of their scores for a fee.

Who influences your credit scores?

The simple answer is “You do.” The detailed answer, however, is much more complex. It's important to realize that your credit scores are in constant flux, changing each time information changes, is added to or deleted from your credit reports. Making a mortgage payment, applying for a department store credit card and opening a new line of credit will all trigger changes in your credit report and, as such, a change in your credit score. A late payment or the closure of a credit card account will also have an immediate impact to your credit score.

The following categories drive your FICO credit score:

• Your payment performance history (35%)
• Your current level of indebtedness (30%)
• The age of your credit history (15%)
• Your pursuit of new credit (10%)
• The type of accounts in your credit report (10%)

As you can see, payment performance and level of debt account for 65% of the points in your FICO score. The remaining categories are worth fewer points but are still very important especially for those who are aiming to earn the highest scores.

Be aware that under the Equal Credit Opportunity Act, credit scoring may not factor in gender, martial status, national origin, race, or religion. And note that while credit scores are important, they're just a measurement of your credit worthiness. Lenders will also consider your income or “capacity” as well as other factors when considering your application. For example, insurance companies will typically consider previous insurance claims when evaluating an applicant.