Credit scores are used to assess your creditworthiness. That is, how likely you are to pay your bills on time. For example, banks, car dealerships, and insurers are all likely to request your credit report and credit scores when deciding whether to provide you with products or services. Even prospective employers like to use credit scores as a proxy for candidates’ ability, or inclination, to act responsibly.
Credit scores are generated by applying a statistical model to the information in your credit reports, along with any other information that may help to predict delinquency. In the United States, such information typically comes from the three major credit bureaus: Equifax, Experian, and TransUnion.
A credit report compiles all available data on your payment history from banks, credit card companies, collection agencies, governments, etc.
The two most prominent scoring models are known as FICO and VantageScore. The former is often used by mortgage lenders while the latter is favored by credit card issuers and car sellers. The models usually yield similar, but not identical, results. Your score continuously updates to reflect the latest information in your reports. Models are periodically recalibrated using new data and new factors viewed as being predictive of future defaults.
Credit scores are three-digit numbers, typically ranging from 300 to 850. A score above 720 is considered very good. Scores in the low 600s raise red flags for lenders.
As an example, FICO® scores are categorized as follows:
–740-799 (Very good)
Over the years the models used to generate credit scores have increased in sophistication. But that doesn’t mean such scores are perfect predictors of a borrower’s creditworthiness. Furthermore, many consumers complain that their credit reports contain errors.
Obtaining credit reports and scores
As a consumer you’re entitled to see your credit report every 12 months from each of the major bureaus. Note this applies to the credit reports, not the credit scores. You can purchase your credit scores from the bureaus or you can access them for free through approved providers including many banks, credit card issuers, auto lenders and mortgage servicers.
A low credit score can dramatically raise your borrowing costs. It may even lead to denial of your credit application for a home, car, or insurance purchase. Periodically, you should request free copies of your reports to ensure they’re accurate. A useful source sponsored directly by the major credit bureaus is: annualcreditreport.com. If you find errors in any of your reports, there’s a formal mechanism for disputing the contents.
If your score is low, take immediate action to rehabilitate it. The process can take years, so you must begin as soon as possible.
Your bank, the credit bureaus, and many other resources can provide you with advice on how to improve your credit score. You may also wish to consider meeting with a credit counselor.