What is credit score?

Often we don't have a proper knowledge of debt, credit and other finance matters, and sometimes it is the only reason that we cannot make us debt free. Personally I feel that learning these all terms is a good way to get a secured and debt free future. When we are aware of our credit/debt score and know that more we are hanged up by taking loans, more we are away to get finacial freedom. So let's learn more about "Credit Scores" and how it works.

How Credit Scores Work?

A credit score is a number that is calculated based on your credit history to give lenders a simpler "lend/don't lend" answer for people who are applying for credit or loans. This number helps the lender identify the level of risk they may be taking if they lend to someone. While the same end result can come through reviewing the actual credit report (which lenders usually do), the credit score is quicker and less subjective. The system awards points based on information in the credit report, and the resulting score is compared to that of other consumers with similar profiles. With this information, lenders can predict how likely someone is to repay a loan and make payments on time. It's the credit score that makes it possible to get instant credit at places like electronics stores and department stores.

Although there are several scoring methods, the score most commonly used by lenders is known as a FICO because of its origins with Fair Isaac and Company. Fair Isaac is an independent company that came up with the scoring method and software used by banks and lenders, insurers and other businesses. Each of the three major credit bureaus (Experian, Equifax and TransUnion) worked with Fair Isaac in the early 1980's to come up with the scoring method.

The three national credit bureaus each have their own version of the FICO score with their own names. Equifax has the Beacon system, TransUnion has the Empirica system, and Experian has the Experian/Fair Isaac system. Each is based on the original Fair Isaac FICO scoring method and produces equivalent numerical results for any given credit report. Some lenders also have their own scoring methods. Other scoring methods may include information such as your income or how long you've been at the same job.

Accessing Your Score

Until recently, your credit score was not available to you. Only lenders and other businesses that used the score could access it. Fair Isaac and Company felt that the score would only confuse consumers since there was nothing to tell them what it meant or what the lenders were looking for.
In 2001, however, all of this changed due to pressure from the U.S. Congress, industry, and consumer groups. Now you can get your credit score at a number of Web sites, including the big three credit bureaus, and at Fair Isaac's Web site. You can also ask your lender for access to your score when you apply for a loan.


Provided by Lee Ann Obringer at "How stuff works": credit score

What is the average credit score and why?

Your credit score has a humble history. In the 1950s, engineer Bill Fair and mathematician Earl Isaac devised a mathematical formula to help creditors analyze data. Their idea was simple but radical: a credit scoring system. It didn't catch on at first, but then Conrad Hilton (founder of Carte Blanche, one of the world's first credit cards) and Montgomery Ward started using credit scores in the late 1950s and early '60s [source: Fair Isaac].

The Fair Isaac Corporation refined its formula as Americans became more dependent on credit. As a result, your FICO score -- the number between 300 and 850 that most people refer to as a credit score -- became widespread. And in 1989, the first general FICO score was issued by a major credit bureau. The score represented -- and still does -- a culmination of your credit worthiness.

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