• Kolton Morrison

What is a credit score?

Establishing a solid credit history is a must have for getting a mortgage one day. With that credit history you get a credit score. A credit score is calculated to show the quality of your credit history. It is a reflection of various details of your past as a consumer. Your score helps a lender determine the likelihood you will pay your loan back. Assessment from a lender is all about your ability and willingness to pay back. Credit is about the willingness portion. The higher the score means to the lender that you will be less likely to miss payments and the lower the score means you are more of a risk to lend money to. This of course is all subject to the scoring model.

Credit scoring used to be done manually where you would be given a certain amount of points for paying loans on time, etc. It used to be used primarily for credit cards and installment loans. Scoring for mortgages is fairly new, coming to strong use in the 1990’s. A company founded in 1956 by an engineer and mathematician created the scoring for mortgages. That company is called the Fair Isaac Corporation or for short FICO. When you hear people asking you what your “FICO” score is, they are just asking what your credit score is.

Depending on your credit history, you can have a score as low as 300 or as high as 850. I have never seen anyone below 475 and if I recall accurately, I have never seen anyone over 820. If you are over 720, you are considered having excellent credit. Between that and 660, you have good credit. Anything below 660 is usually due to numerous late payments or things like a bankruptcy or foreclosure.

I have always felt in the dark in how credit scores are actually calculated. Credit companies keep their algorithms private as they do not want to arm the public with the ability to manipulate their scores. All in all it is basically a two-year overview of most recent credit behavior.

Your credit “FICO Scores are calculated using many different pieces of credit data in your credit report. This data is grouped into five categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).

Your FICO Scores are unique, just like you. They are calculated based on the five categories referenced above, but for some people, the importance of these categories can be different. For example, scores for people who have not been using credit long will be calculated differently than those with a longer credit history.

In addition, as the information in your credit report changes, so does the evaluation of these factors in determining your FICO Scores.

Your credit report and FICO Scores evolve frequently. Because of this, it's not possible to measure the exact impact of a single factor in how your FICO Score is calculated without looking at your entire report. Even the levels of importance shown in the FICO Scores chart above are for the general population and may be different for different credit profiles.”

Well there you have it, directly from the horse's mouth over at the Fair Isaac Corporation. So all in all, do not carry high balances on your credit cards, and never be late or miss any payments on any debt that you carry.

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