3. Creditworthiness and Credit Records

b. Credit Scores

You may wonder how a creditor can look at all the information on your credit report and make a fair decision about your credit. One way creditors do this is by using a computer model to analyze your credit report and give you a credit score.

What is a credit score?
A credit score is used to predict how likely a person is to repay a new loan based on experience with millions of consumers. Usually, when lenders talk about "your score," they mean the FICO® score developed by Fair Isaac Corporation.  Other different computer models may be used, too. These models add up points for each piece of information of a credit report. For example, making payments on time every month is positive for the score. Charging above the maximum amount on a credit card is negative.

What is a “good” credit score?
That depends on the credit-scoring model and the lender. However, the most widely used credit scoring models range scores from 300 to 850; the higher the number, the better. In addition, each creditor decides what credit score range it considers a good risk or a poor risk. For this reason, the creditor is the best source to explain what your credit score means in relation to the final credit decision.

How do I find out what my credit score is?
To order your credit score visit one of the three major credit-reporting agencies. They will most likely charge you a small fee to provide your credit score.
How can I improve my credit score?
If the creditor has told you that you have a poor credit score and turned you down for credit because of it or offered you a higher interest rate than you were expecting, there are steps you can take. First, you have the right to request a written explanation from the lender that turned you down. Then, you can make a plan to begin to address these issues. You can also get a credit score from the credit reporting agencies, usually for an additional charge. On this report, the credit-reporting agency may tell you what you can do to improve your score. Credit scores may not consider your race, color, religion, national origin, sex and marital status, and whether you receive public assistance.

What other factors affect qualifying for a loan?
Remember that the lender, not your credit score makes the final decision to approve a loan application. A credit score is simply a tool used by the lender. The lender may take into consideration any special reasons for your past credit problems. In addition, the lender will look at more than just your credit score—such as the equity in your home or other property, job history, income, savings, and the type of loan you want—before making a final decision.