Introduction to Credit Scoring

Your credit score is a numerical value that reflects how well you've managed your credit over the last seven to 10 years. Lenders use your score to help them decide how risky you are as a borrower.

When lenders extend credit, their primary concern is that you're capable and willing to repay the debt. They typically look at several factors to make this determination, including income, employment history, existing debt level, and credit score. Your income and debt levels tell lenders how much discretionary income you have. Your employment history helps indicate how stable you are financially. Your credit score provides insight into your spending and repayment habits.

Lenders use these factors to decide two things-whether or not to extend you credit, and the rate of interest to charge if a credit offer is made.

Riskier borrowers pay higher interest rates. That's why understanding and managing your credit score is so important-because optimizing it can literally save you tens of thousands of dollars over your lifetime.

What is FICO?

FICO scores, developed by Fair Isaac Corporation, are the most commonly used credit scores. Your FICO score is calculated (by way of highly confidential algorithms) from the information contained in your consumer credit report.

The FICO scale ranges from 300 to 850, with a higher number meaning less risk for the lender. There are no set levels defining a good or bad score; this determination varies by lender based on its underwriting practices. Generally speaking, a FICO score of 750 or above indicates good credit management skills, while one below 650 is in need of improvement.