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How
Credit Scoring Works
Along with the
credit report, lenders can also buy a credit score
based on the information in the report. That score
is calculated by a mathematical equation that
evaluates many types of information that are on your
credit report at that agency. By comparing this
information to the patterns in hundreds of thousands
of past credit reports, the score identifies your
level of future credit risk.
In order for a
FICO® score to be calculated on your credit report,
the report must contain at least one account which
has been open for six months or greater. In
addition, the report must contain at least one
account that has been updated in the past six
months. This ensures that there is enough
information — and enough recent information — in
your report on which to base a score.
About FICO
scores
Credit bureau scores are often called "FICO
scores" because most credit bureau scores used
in the US are produced from software developed by
Fair, Isaac and Company (FICO). FICO scores are
provided to lenders by the three major credit
reporting agencies: Equifax, Experian and Trans
Union.
FICO scores
provide the best guide to future risk based solely
on credit report data. The higher the score, the
lower the risk. But no score says whether a specific
individual will be a "good" or
"bad" customer. And while many lenders use
FICO scores to help them make lending decisions,
each lender has its own strategy, including the
level of risk it finds acceptable for a given credit
product. There is no single "cutoff score"
used by all lenders.
More than one
score
In general, when people talk about "your
score," they're talking about your current FICO
score. However, there is no one score used to make
decisions about you. This is true because:
- Credit
bureau scores are not the only scores used.
Many lenders use their own scores, which often
will include the FICO score as well as other
information about you.
- FICO scores
are not the only credit bureau scores. There
are other credit bureau scores, although FICO
scores are by far the most commonly used. Other
credit bureau scores may evaluate your credit
report differently than FICO scores, and in some
cases a higher score may mean more risk, not
less risk as with FICO scores.
- Your score
may be different at each of the three main
credit reporting agencies. The FICO score
from each credit reporting agency considers only
the data in your credit report at that agency.
If your current scores from the three credit
reporting agencies are different, it's probably
because the information those agencies have on
you differs.
- Your FICO
score changes over time. As your data
changes at the credit reporting agency, so will
any new score based on your credit report. So
your FICO score from a month ago is probably not
the same score a lender would get from the
credit reporting agency today.
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