Credit Score

Credit score is also known as credit rating or FICO score or FICO rating. It is an indication of the credit risk you are seen as by the credit industry. It is shown as a number, generally  in the range 300 to 850. The higher the number, the better for you, as it suggests you are a good credit risk - that is, someone who will pay off their debts on time. Only about 40% of the population gets a score over 750.

Credit scores tend to be interpreted in different ways by lenders. Some financial institutions will only lend to people with a credit score at the top end of the range, whilst others may be a lot more flexible. It depends on who the lenders are marketing their financial products to. Just because someone has a credit score lower down the scale doesn't necessarily mean they won't get credit, but it might mean they have to pay a higher rate of interest than normal, to secure the loan they want.

It helps to understand what factors make up your credit score. As a general rule:

• 35% comes from your credit history, that is, how well you have repaid borrowings in the past.
  
  
• Around 30% of your credit score is calculated from your current level of debt. If your debt burden is high, even if you have no history of late payment, it will be considered that you are perhaps over-extending yourself, to the point where you may have difficulty in repaying in the future.
  
  
• Up to 15% comes from the length of time you have had credit. A short period is generally insufficient to gauge an individual's ability to manage credit commitments properly.
  
  
• Approximately 10% of credit score is determined by the kind of credit you have. Lenders prefer to see different types of credit in a report as it suggests a borrower can manage most types of credit.
  
  
• Any new credit taken on accounts for around 10%, so if you have recently arranged other loans, this can work against you.

The actual calculation of credit scores is made by complex and sophisticated computer software, and mathematical models, used by the credit reporting agencies. They employ their own way of analysing the information in individuals' credit files but they all tend to use computer software that was developed by the Fair Isaac Corporation. Hence credit scores are sometimes referred to as FICO - an acronym for the company.

More Credit Score Information

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