Credit Score

How Credit Scores Work

The first thing you need to know about your credit score is that you don’t have a credit score: you have many, and they change all the time. Credit scores are designed to be a snapshot of your credit picture typically, the picture that’s contained in your credit report New information is constantly being added to your report, and old information is being deleted. Those changes affect your score. That can be good news or bad news. The good news is that if you have a bad score now, you’re not stuck with it forever. You can do a lot to improve your situation and make yourself more credit-worthy in lenders’ eyes. The bad news is that you can’t rest on your laurels. When you have a good score, you need to constantly monitor your credit to make sure it stays that way.

You also should know that there’s more than one credit-scoring system out there. In fact, there are currently more than 100 credit-scoring models being marketed to lenders. The best-known credit-scoring model, the FICO, is designed to predict whether a borrower will default. But credit-scoring systems have been created to do all of the following:

• Detect fraud in credit or insurance applications
• Calculate the amount of profit a credit card issuer is likely tomake on a particular account
• Predict the risk of a specific kind of default, such abankruptcy
• Forecast the probability that a policyholder will cost an insurer money
• Anticipate the risk that a consumer will default on a certain type of account, such as an auto loan, a mortgage, a cellular phone account, or a utility bill
• Estimate how much a borrower is likely to pay, if anything,on a delinquent account anticipate which customers might close a credit card account or pay the balance down to zero
• Predict the likelihood that someone will respond to a direct mail credit card solicitation The vast majority of these scoring systems are developed by the same company that created the FICO: Fair Isaac.
• In addition, the credit bureausand some outside companies have created their own formulas.

All that being said, you’re far more likely to be affected by a FICO score or its cousin, the NextGen score, than any other type of credit score. FICO is the industry leader. It’s used in literally billions of lending decisions each year, including 75 percent of mortgage-lending assessments. That’s why the information in this chapter and elsewhere is based on how the FICO formula calculates your score. Other formula designs might differ somewhat in their details, but the behaviors that help and hurt your score are pretty consistent across the various systems.