The Credit Score Scale

Filed Under Credit

Is there anyone on the planet that hasn’t yet heard of a credit score? Well, just in case you haven’t, it’s that nifty little number put together by the Fair Issac Corporation that purports to measure your credit worthiness. The higher your number in the credit score range, the less of a risk you are said to be and the more likely you are to pay back any money loaned to you.

The actual number is commonly referred to as your FICO score (FICO being an abbreviation/acronym for Fair Issac Corp.). It’s been used in the credit world for quite some time now and has survived against all challengers to be the single most used credit score scale – period. There are still some competing measurements, but no other score is used as much by lenders to underwrite loans as the FICO score.

As credit score ranges go, the FICO score is a bit odd. The low score is 300 and the high is 850 (no zero’s or 100%’s here). Obviously a score of 300 would mean you are a terrible credit risk a bank loan officer would run away at the very sight of you. On the other hand, anything close to an 850 would probably mean that same loan officer would invite you out to lunch on a regular basis. The in-between numbers are the interesting ones.

Somewhere in the low 600’s is the dividing line between a good borrower and bad borrower. Exactly where that line is, depends on the lender you’re talking to at the time and their current policy. As the score inches closer to 700 the more comfortable a lender is with you. And anything over 700, especially in today’s economy, almost guarantees you a loan. An average credit score is in the mid to upper 600′s.

If you don’t use credit, then your score is moot; it doesn’t matter. But if you do use or intend to use credit in the future, your score has a significant impact on you. Let’s say you’re in the middle 600’s and I’m in the middle 700’s and we both go to the bank for a personal loan. We ask for exactly the same loan amount and pay-back terms. In one case you might be quoted an interest rate 50% higher than mine which means over the course of the loan you’ll pay a lot more money back to the bank. In another case, you might simply be denied the loan while I am not. And this will all be because of our credit scores.

The FICO score is somewhat shrouded in secrecy, at least the formula is. They don’t want the specifics to get out into the public because the powers that be are afraid that normal citizens will then be able to game the system and thus make the score worthless. That would not be a good thing for Fair Issac Corp. because right now the FICO score is anything but worthless. In fact this credit reporting is pretty much a cash cow for them.

You see they compile and sell the scores to many clients. For instance they supply the major credit bureaus with scores on a regular basis. But it doesn’t stop there. Many banks, utility companies, and retail stores are clients. And now, more and more, prospective employers are clients as well because many companies are using poor credit as a reason to disqualify job applicants.

While the internal workings of the FICO are kept close to the vest, the general workings are well known. A typical score is made up of several individual scores from different credit categories. For instance, the length of your credit history and the types of credit you have will contribute to your score. Also important is how well you’ve used or paid back the credit that you currently have along with your ratio of debt. Even the number of credit inquiries made about you (to the credit bureaus) factor into your overall score.

Generally, if you’re handling those credit activities well, i.e. paying your credit card bills and other debts on time, lowering your overall debt, etc., your score will rise over time. And that’s where you want to go because the higher your score, the more money you can borrow or the better terms you can get when you do borrow. So handle your existing credit as well as you can. If you can keep moving up the credit score scale, you’ll find yourself in a better credit position down the road which could help you to a better financial position too.

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