What Factors are used to Determine Credit Scores?

A credit score is a number which is used to determine a person’s risk level in regards to how likely they are to repay loans and other services which require a good credit rating. This gives potential creditors a general idea of how seriously a person takes the repayment of financial obligations. Some of the most common issues which require a business to request information regarding a person’s credit rating include such issues as:

  • Borrowing money
  • Buying a home
  • Renting a home
  • Buying a car
  • Applying for credit cards

There are three agencies that obtain information on individuals regarding their credit risk and therefore each person has three separate credit scores. Each time credit is obtained or payments or made late or missed altogether it causes a change in that person’s credit score. Over time these negative actions can cause a significant decrease in a person’s credit score resulting in creating a difficulty for that person to obtain any service or item that requires a good credit score.

Before these credit agencies can have the ability to determine a person’s credit score the person in question must have at least one account that has been open for minimum of six months or longer as well as one account that has been updated in that length of time. This is to ensure that there is adequate information to determine an accurate credit score for that individual.

These credit scores are often called ‘FICO’ scores because the credit agencies use special software that was invented by Fair Isaac and Company to help determine these scores. Credit scores are then provided to potential creditors by these agencies to help them decide whether or not to grant that person credit based on the amounts of these scores.

These FICO scores are considered to be the source available to give creditors the proper data to evaluate the risk expected in regard to each person attempting to obtain credit for whatever reason. Low scores due to late or delinquent payments in the past cause individuals to have a difficult time obtaining these services which is why keeping all payments current is so important to your credit score.

Each agency has their own terminology for these scores even though they are determined using the same concept and have been rigorously tested for effectiveness and accuracy. Some of these other terms used include the following:

  • Equifax – BEACON
  • Experian – Experian/Fair Isaac Risk Model
  • TransUnion – EMPIRICA

Each of these scores are calculated the same way using the same methods however this is the name given to these scores by each individual credit agency.