 TITLE: What is a Credit Score CONTENT: Basics of Credit Scoring\n------------------------\n###### Written by: Kristy Welsh\n_Last Updated: September 25, 2017_\nYour credit score can mean the difference between being denied or approved for credit, and a low or high interest rate. A good score can help you qualify for an apartment rental or a job and even get your utilities connected without putting up a deposit.\nBut, most Americans do not understand what goes into computing their credit score or how their score will affect their ability to get a mortgage, car loan, or a credit card. This comes from a survey of 1,000 adult Americans commissioned by the non-profit Consumer Federation of America. Also revealed was that even those who have obtained their scores have serious knowledge deficiencies about what is all means.\nA credit score is a three-digit number generated by a mathematical algorithm using information found on your credit report. This number is designed to predict risk, specifically, the likelihood that you will become seriously delinquent on your credit obligations in the 24 months after scoring.\n**What Types of Scoring Models Are There?**\n-------------------------------------------\nThere are a multitude of credit-scoring models in existence, but one dominates the market: the FICO (Fair Isaac Corporation) Score. FICO has been in business since the 1950s but began the famous FICO Score in the mid-1980s. The highest FICO score is 850 and the lowest is 300. According to myFICO.com, 90 percent of all financial institutions in the U.S. use a FICO Score in their decision-making process.\nThere is another scoring model out there called VantageScore. The big three credit reporting agencies decided to create their own credit scoring model which would replace the Fair Isaac model. VantageScore was launched in March of 2006 and in 2015, the third version, VantageScore 3.0, was unveiled. This update now uses the same scoring scale as FICO, 300 to 850, making it easier for consumers to interpret and mange their scores.\n**How Does Credit Scoring Work?**\n---------------------------------\nYour daily transactions are followed by computers at service provider centers and these centers provide your information to the three main credit bureaus — Experian, Equifax, and TransUnion. This ongoing evaluation process looks at your payment history, outstanding debt, length of time you've had credit, new credit, and the types of credit you currently have and compares this information to other consumers with similar histories and profiles. This information then gets fed into each of the credit bureaus own scoring methods and out pops a number. Some lenders may also have their own methods of scoring your information.\n**Can You Check Your Credit Score?**\n------------------------------------\nFederal law mandates the consumer's right to a free credit report annually from each of the credit reporting agencies, but not to a free credit score. You can get your score along with your free report for a small fee. There are also numerous advertisements from companies that will provide you a free credit score, if you sign up for their credit monitoring program. Usually, you are afforded a free trial period so if you cancel before then, you just got your score for free. We have a list of ways to get a free score along with your credit reports on our site.\n**How Does Your Credit Score Affect Your Life?**\n------------------------------------------------\nIf you are not careful about your credit, having a low credit score will cost you a lot of money. As your credit score decreases, you become a higher risk to lenders and they will in turn charge you a higher interest rate on your loan or credit card. Let's say you have poor credit (500 to 589) and you want to get a car loan. Your interest rate could be in the neighborhood of 18 percent. But, if you had good credit (660 to 689) your interest rate might be cut in half. Over the period of a 5 year loan, that is a lot of money you would be spending if you had poor credit.\nIn addition to banks and lenders, there are landlords, merchants, employers, and insurance companies jumping on the credit score bandwagon. Of all of these, the fact that insurance rates are being determined by credit scores is causing consumers the most alarm. This is called your insurance score and some states are passing laws to restrict this practice but it is an all too real example of how a credit score can infiltrate your life.\n**What Has Our Government Done to Protect Us?**\n-----------------------------------------------\n*   The Fair Credit Reporting Act has been amended frequently, and its regulatory requirements toughened.\n*   The Equal Credit Opportunity Act and its regulations provide a framework for scoring.\n*   Congress has provided a great deal of new regulation, including the opportunity for any individual to examine their credit report for free once a year. In fact, a free credit report is available for anyone denied credit.\n*   You have the right to know why you were denied credit, and you have the right to appeal if any inaccurate information was used in the decision.\n*   All consumers MUST be allowed to appeal the use of inaccurate information, and may file suit if they consider the evaluation process to have been illegally discriminatory or statistically invalid, and such information must be divulged in the discovery phase of any lawsuit.\n**How Can We Protect Ourselves?**\n---------------------------------\nAll consumers can, and should, request a credit report from each of the major agencies annually, and update or correct all inaccuracies, errors, and other problems.\nAmerica has the most efficient, easily used measures against incorrect reporting. It also has carefully enforced laws against improper use of the credit bureau report. All adverse actions by a creditor must be explained, and full disclosure of reasons for the decision given, and appeals must be allowed and considered in good faith. END