Credit scores are ratings used to show the trustworthiness of a loan applicant. The likelihood the borrower will default decreases as their credit score rises.
Various credit score tables are used in the USA by credit rating agencies. The most popular credit score table is the FICO (used by the Fair Isaac Corporation) with a score range of 301 to 850. Good credit is usually defined as having a rating of over 700. Approximately 60% of Americans have good credit scores, with 723 being the median score.
Let’s take a look at how credit scores work and what they mean for you.
1. How Credit Scores are Determined
A credit score is based on a record of how an individual or business conducts their financial affairs over a certain period of time. Someone who regularly defaults on loan payments, pays late, or declares bankruptcy gets a low rating, and the opposite also holds true.
However, the full picture is not so black and white. For example, if the credit bureau lacks information about a loan application they generally give them a low rating. This practice could discriminate against young people without a previous credit history, or anyone who has not used a credit line for a long time. In the world of finance no borrower can expect to be considered innocent until proven guilty.