When getting a loan, whether for a house, car or big purchase item, a financial institution will look at your credit score to see what kind of risk they will incur by loaning you this money.
A credit score comes from a credit report. A credit report details your credit availability and your habits: Do you pay your bills on time; What are your monthly payments; How many credit cards do you have; What is the line of credit on those cards; What is the balance; Do you have a mortgage; Have you filed for bankruptcy?
A lender will look at this report and decide whether the loan is a good or bad risk.
When you apply or buy something with your credit card, pay a bill (or don't pay a bill), take out a mortgage or finance your car with the dealership, the information gets report to one or all three of the reporting agencies: Equifax, Experian, and TransUnion. The agencies collect this data then sell the report to businesses and lenders to they can evaluate your application.
The three agencies use proprietary formulas to calculate the information on the report. As not all creditors (card companies, banks, landlord, department stores, etc.) report to all three agencies and each calculates the information differently so your score will differ from each agency.
There are different formulas for getting a credit score from the credit reports depending on what kind of credit or loan you are applying for. The most famous is the FICO score which is used for mortgages, car loans, and credit cards. The formula was developed by Fair Isaac and Company (Fair Isaac and Company - FICO) and is used to show the possible loan default risk.
A lender will pull your report from all three of the reporting agencies or just one and use the FICO software to create your score. The FICO score assigns a number from 850 (great) all the way down to 300 (horrid). The average consumer in American has a score of around 620. As mentioned above, not all creditors (credit card companies, banks, landlord, department stores, etc.) report to each of the three agencies and since each agency uses a different method to calculate your credit information your score will differ from each agency, sometimes as much as 50 - 100 points. A score might look something like this: 650, 620, 642, with the lender taking the middle score as the average, so that this person has a score of 642.
The following factors go into calculating your score:
1. Your bill paying history. Do you pay your bills on time?
2. Your loans and credit card debt.
3. How long have you had credit?
4. How many lines of credit do you have?
5. Have you opened up new lines of credit or have there been multiple inquires.
