The credit score measures the financial credit worthiness of a borrower. With credit score information, the lender assesses the risk involve in lending sum of money to the borrower. The Credit Bureaus and Fair Isaac Corporation closely guards the mathematical calculations. The calculations involve the analysis of large financial data. And, the public may not know how the Credit Bureaus and Fair Isaac Corporation arrive to the score. Anyways, the calculations are too difficult for the public to understand.
The lender will know how much loans, down payment, fees, interest rates, and terms to offer to the borrower through credit scores. The borrower receives better interest rates and lesser fees with a higher the credit score.
Credit Score of Fair Isaac Corporation
Fair Isaac Corporation is also known as FICO. FICO provides the best known indicator of financial credit worthiness to lending institutions. The FICO credit score ranges from 300 to 850. A credit score of 660 puts the borrower as potentially Subprime where are borrower with blemished and limited credit history. A higher credit score indicates better financial credit worthiness.
Most borrowers average from 600 to 800 credit score. Lending institution favors above 720 of credit score. In the United States, the borrower averages 680 of credit score.
The credit score represents 35% punctuality of payments, 30% amount of credit used, 15% length of credit history, 10% types of credit used, and 10% the frequency of credit application.
Credit Score of Credit Bureau
In the United States, the three main credit bureaus are Equifax, Experian, and TransUnion. The Equifax, Experian, and TransUnion can provide credit report to any individual once a year. The credit report shows the financial history of an individual.
The credit bureaus created their own credit score. The credit score ranges between 0 to 100%. The higher scores look better for lenders. Usually, the scores fall between 60 to 70%.
The final thoughts
The credit score does not include the age, race, job, income, education, religion, origin, and marital status into the equation. The Equal Credit Opportunity Act prohibits the use of age, race, job, income, education, religion, origin, and marital status to determine the financial credit worthiness.
The late payments on loans, absence of credit preferences, lack of credit history, and uncontrollable use of credit cards brings the credit score down. Without a credit history, the lenders would not know how the borrower handles their finances.
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Also read: Reasons to Establish Business Credit!
