A credit score is a rating used by lenders to: determine your credit worthiness (the likelihood that you’ll fail to pay as agreed during the next 2 to 3 years), how much credit to lend and at what rate to lend it. Typically, credit scores range from 300 to 850.  The higher the score, the less risk you represent.

History of credit scores

Credit scoring systems became prevalent in the 1960s and involved solely using human judgment to determine the granting of credit.  Due to the slowness of this process and the subjective nature of manually reviewing every credit report, lenders began to standardize the methods used in determining how they made credit decisions.

During the 1980s, Fair, Isaac, and Company developed a statistical model (the FICO® score) allowing a more accurate prediction of the risk a lender faces in granting credit.  This model evaluates the information from your credit report and then compares that information to patterns found in hundreds of thousands of other consumers.  Being more objective and more efficient, this method is now widely used.

Types of Credit Scores

While the most commonly used credit score method is the FICO® method (used by over 70% of creditors), there are many different methods used; therefore, your credit score may vary from lender to lender.

How are credit scoring models developed?

Lenders create their models using several criteria:

• Selecting a large sampling of customers
• Analyzing the data in their credit reports to determine which factors relate to creditworthiness
• Assigning a degree of importance to each factor, based on how accurate a predictor it is in determining who will repay their debt on time

Your credit score is only one factor that a lender will use in making these decisions.  Lenders may try to get a “bigger picture” by looking at your credit report, the information that you provided on your credit application, and even possibly their current relationship with you.  Each lender will have its own guidelines on granting credit, so it never hurts to ask about their policies!

Because credit scores fluctuate as the items in your credit report change, they are generated only when a lender requests your credit report and are not stored as part of your credit history.  (For example, payments or new accounts could cause your score to change.) Your score from two months ago will not be the same score that you would receive today, in most cases.

You may not have a credit score if any of the following conditions exists:

• Your credit report does not contain at least one account
• A remark on your account references a person who is deceased
• Your social security number matches a number in the Social Security Administration’s “Death Claim Index”