Alabama Credit Basics
You've Heard of Credit Scoring, But What Exactly Is It?
Credit scoring is a scientific method that uses statistical models to assess an individual's credit worthiness based on his or her credit history and current credit accounts. Credit scoring was first developed in the 1950s, but has come into increasing use in the last two decades.
In the early 1980s the three major credit bureaus, Experian, Equifax and Trans Union all worked with the Fair, Isaac company to develop generic scoring models that allow each bureau to offer a score based solely on the contents of the credit bureau's data about an individual. Creditors especially those in the mortgage industry frequently use the scores when deciding who receives loans. They can order your score, commonly called a FICO score, from one of the bureaus, but it only draws upon information from your credit report. Now you can see the type of score lenders use when deciding whether to give you that loan. Along with your Personal Credit Score, you'll receive personalized analysis and tips that can help you improve your credit rating. So know the score today!
What Does It Mean?
Each credit bureau has its own unique system for compiling credit scores. However, the scoring models have been normalized so a numerical score at one bureau is the equivalent of the same numerical score at another. Thus, a score of 700 from Equifax indicates the same creditworthiness as a score of 700 from Trans Union or Experian, even though the calculations used to determine those scores are different at each bureau.
What's A Good Score?
In general, you are likely to be considered a better credit risk if your FICO score is high. Under mortgage lending guidelines, for example, a score of 650 or above indicates a very good credit history. People with these scores will usually find obtaining credit quick and easy, and will have a good chance to get it on favorable terms.
Scores between 620 and 650 (average FICO scores fall into this range) indicate basically good credit, but also suggest to lenders that they should look at the potential borrower to assess any particular credit risks before extending a large loan or high credit limit. People with scores in this range have a good chance at obtaining credit at a good rate, but may have to provide additional documentation and explanations to the lender before a large loan is approved. This means that their loan closing may take longer, making their experience more like that of borrowers in the days before credit scoring, when every individual was researched.
A score below 620 may prevent a borrower from getting the best interest rates, as they may be considered a greater credit risk-but it does not mean that they can't get credit. The process will probably be lengthier and, as noted, the terms may be less appealing, but often credit can still be obtained.
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