Credit Scores

A credit score is a number usually between 300 and 850 which is based on a statistical analysis of your credit files and is used to represent, in a numerical and comparative fashion, your creditworthiness to lenders; or rather, the likelihood that you will pay what you owe. Your credit score is mostly based on credit report information, which usually comes from the three major credit reporting agencies: Experian, TRANSUNION, and EQUIFAX

Lenders, such as banks, credit card companies, or mortgage brokers, employ credit scores to establish the potential risk of lending money to consumers and to lessen losses due to bad debt.  Lenders use credit scores to determine not only who qualifies for a loan but also the interest rate, and the credit limits. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system. The most popular, or most well-known and used, score in the U.S. is FICO.
FICO stands for, or refers to, the Fair Isaac Corporation. The FICO score is calculated by applying statistical methods, developed by Fair Isaac, to information in a person's credit file. Banks and other institutions that use scores as a factor in their lending decisions may deny credit, charge higher interest rates or require more extensive income and asset verification if the applicant's credit score is low.
Credit scores are designed to gauge the risk of default by taking into account various factors in a person's financial history. Although the exact criteria/formulas for calculating credit scores are closely guarded secrets, Fair Isaac has disclosed the following components and the approximate weighted contribution of each:

1. 35% punctuality of payment in the past
2. 30% the amount of debt, expressed as the ratio of current revolving debt to total available revolving credit
3. 15% length of credit history
4. 10% types of credit used
5. 10% recent search for credit and/or amount of credit obtained

While these percentages are useful in helping to understand what goes into the makeup of your score and how a rating may be improved, they remain limited and simplistic. In addition, it’s important to remember that Fair Isaac does not use the same "scorecard" for everyone. The scorecards are segmented so that there are over 100 different scoring models that are applied to different individuals based on different ranges of input values (some scorecard segmentations include: age, depth of credit history, etc.) Current income and employment history do not influence the FICO score, but they are weighed when applying for credit. So, an unemployed individual with no other sources of income will not usually be approved for a home mortgage, regardless of how amazing his or her FICO score may be.
A FICO score generally ranges from 300 to 850. It exhibits a left-skewed distribution with the median score in the U.S. being around 725. Generally, 660 is regarded as potentially sub-prime and represents an important break point for credit worthiness.
If you’re interested in knowing your own credit score or haven’t checked it in a while, it might be a good idea to request a free credit report .This will not only give you a better idea of the type of loans and rates that you can anticipate receiving, but will also provide you the opportunity to scan for errors in your report(s) which may be bringing your score down.