Credit Scoring Made Simple

Finding out your credit score doesn't cost a lot and takes only minutes to do - which may be time very well spent.

So what is credit scoring?
Credit scoring was first developed in the 1950s as a method of assessing the credit risk of a loan applicant using mathematical models to evaluate a person's credit worthiness based on their credit history and current credit accounts. The system has come into widespread use in just the last couple of decades.

In the early 1980s, the three major credit bureaus (Experian, Equifax and TransUnion) each developed scoring models that allowed them to offer a score based solely on the data of one individual. Creditors, especially those in the home mortgage industry, frequently use these scores when deciding who gets a loan and at what rate. However, it's worth remembering that creditors also consider other information, such as your salary or employment history, when making loan decisions.

What's in a score?
Credit scores are reported as a number, usually in the 330 to 830 range. The higher the number, the better the score. Creditors see the number as an indicator that an individual will repay a loan. Typically, scores are determined by reviewing the following data:

• Your history of late payments
• Non-payments
• Current level of debt
• Types of credit accounts
• Length of credit history
• Number of credit inquiries
• History of applying for credit

Personal details such as race, gender and religion are definitely not considered when determining your score. It's also worth noting that each major credit bureau has its own method for calculating credit scores. However, the scoring models have been fairly well standardized so that a "600" score at one bureau is roughly the equivalent to the same score at another.

What's a good score?
Overall, a higher score indicates lower credit risk. People with high credit scores, all things considered, have a good chance of obtaining quality loans at the best interest rates.

Average scores indicate good credit, but also may point to potential trouble areas that creditors will want to look at and review. A lender may require additional documentation before a loan will be approved.

With lower credit scores, consumers may find that they can still obtain a loan. However, the process will be lengthier and more involved, as creditors consider scores below this threshold to be an indicator of greater credit risk.