What is a Credit Score?

A good credit score is very important when applying for a loan. The bank (or other lender) will take your score into consideration when evaluating your loan request. The FICO standard is a credit scoring developed by the Fair Isaac Corporation and is the system favored by most banks today. According to FICO, the credit ranges from 300 to 850; although, anything below 650 is considered to be a "subprime" score.  

To determine your credit score the bank calculates your payment history, amounts owed, length of credit history, new credit and types of credit used. Banks and other lending companies use your credit score to assess your reliability in paying back loans. If your score is low, then they will regard you as a high risk candidate and likely not approve your loan. If the opposite is true and your score is high, then you are more likely to be approved for a loan.

Payment History (35 percent of the score) includes:

•  Account payment information on different types of accounts
• Any adverse public records such as bankruptcy, judgments, suits, liens, wage attachments, collection items, or any past due items
• How long your past due items have been late (if any)
• How recent your past due items became delinquent, adverse public records, or collection items
• How many past due items you have on file
• Number of accounts paid as agreed
  

Amounts Owed (30 percent):

• Amount owing on accounts
• Amount owing on specific types of accounts
• Lack of specific type of balance, in some cases
• Number of accounts with balances
• Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
• Proportion of installment loans amounts still owing (proportion of balance to original loan amount on certain types of installment loans)

Length of Credit History (15 percent):

• Time since accounts opened
• Time since accounts opened, by specific type of account
• Time since account activity

New Credit (10 percent):

• Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
• Number of recent credit inquiries
• Time since recent account opening(s), by type of account
• Time since credit inquiry(s)
• Re-establishment of positive credit history following past payment problems

Types of Credit Used (10 percent):

• Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)

If a credit score is low, there are a number of ways to bring it up. Learn more about raising your credit score.