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All about credit scoring
Your credit score. You hear it all the time but what does it mean to you? Your credit score comes from an algorithm that the credit bureaus use or develop to gage how credit worthy you are. Also known as FICO® (Fair Isaac and Co.)

The credit score is provided to lenders to give them an idea of how well you pay your bills, the odds that you will default and your overall credit performance. Many lenders rely on your credit score when considering loan approval, and a low credit score can squash your chances for approval.

Credit scores are important because they are used by almost all lenders and have a direct impact on your credit. The higher your score the better your chance of getting good loan rates and approvals. The lower the score the higher interest rates you will pay because you are 'more of a risk'.

Below is the graph of scores. Remember the higher the better. Currently you can get your credit score from the bureaus which some use their own formula and some use Fair Isaac®. Also many websites offer their own credit scoring algorythm but the numbers vary depending on which score you get. Generally it is a good idea to get the credit score that the bureaus use and not a credit score that a credit website may come up with.

FICO ® Score Odds of a Delinquent Acct. RATING
585 POOR CREDIT
600 POOR CREDIT
615 POOR CREDIT
630 POOR CREDIT
645 POOR CREDIT
660 POOR TO FAIR
680 POOR TO FAIR
700 FAIR TO GOOD
760 GOOD TO EXCELLENT
780 AND OVER EXCELLENT CREDIT LOW DEFAULT RATE

FICO® will be changing.. A new model will be released in 2008. FICO® is a mathematical model created as a tool for lenders to use in evaluating the risk associated with lending you money.

FICO® stands for Fair Isaac Company, the company that created the original scoring model. The formula used by Fair Isaac utilizes everything from numerous addresses, alias names, occupation, length of time you have had credit and other factors to come up with your score. People who have all good credit may score low because all of their credit is fairly new, based on Fair Isaac. Many disagree with the scoring module and for good reason.

The module seems a bit bias and can sometimes make no sense at all. More lenders are relying on desktop underwriting which analyzes your score without really looking at your credit or explanations for past bad credit. You can improve your score but not overnight. Scoring can take time to build and each bureau has their own independent score known as FICO®, Empirica® or Beacon®.

1. What is a credit score?
A credit score is a sum used by lenders as an indicator of how likely you are to repay your loans. Your credit score is generated by a mathematical formula utilizing the data from your credit report. Lenders have been using credit scores as part of the lending decision for more than 30 years.

2. What factors influence my credit score?
Various factors determine your credit score, including the following:

-Payment History
-Outstanding debt
-Length of credit history
-Severity and frequency of derogatory credit information such as bankruptcies, charge-offs, and collections
-The amount of credit used compared to the credit available

3. How does my credit score affect me?
Your credit score is an important indicator of your financial health. Lenders use your credit score to determine:

-Whether or not you are a good candidate for a loan
-What type of interest rate you will pay.

While your credit score is a key determinant of your creditworthiness, lenders also examine the information on your credit report and your loan application. Regularly checking your credit report enables you to:

Be informed of the most up-to-date information in your credit history, correct any inaccuracies, to make sure that your credit data is a true depiction of your credit record and increasing your chances of receiving credit under the best possible terms

4. What is a "good" credit score?
There are several types of credit scores available. Typically, the higher the score, the better. Each lender decides what credit score range it considers to be a good credit risk or a poor credit risk. For this reason, the lender is the best source to explain what your credit score means in relation to the final credit decision. After all, they determine the criteria used to extend credit. The credit score is only one component of information evaluated by lenders.

5. How do I improve my credit score?
These common guidelines and practices will generally help raise your credit score:

-Be Punctual

-Pay all of your bills on time. Lateness, collections, and bankruptcies have the greatest negative impact on your credit score.

-Check your credit report regularly and take the necessary steps to dispute inaccuracies.

-Don't let your credit health suffer due to inaccurate information.

- Watch your debt.

-Keep your account balances below 75% of your available credit. For instance, if you have a credit card with a $1,000 limit, you should try to keep the balance owed below $750.

-Avoid "quick" credit fixes.

-A good credit score is created over time and reflects a number of interrelated factors.

-Avoid excessive inquiries.

A large number of inquiries occurred over a short period of time may be interpreted as a sign that you are:

-Opening numerous credit accounts due to financial difficulties.
-Overextending yourself by taking on more debt than you can actually repay.

6. How is a credit scoring model developed?
A lender creates a credit scoring model by 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 of the factors, based on how accurate a predictor it is in determining who will repay their loan on time.