Credit Scores
Credit scores are measures of a person’s risk of loss due to that person’s default on a loan or other line of credit. In the U.S., this is measured on a scale from 300 to 850, and is based on the person’s credit activity history. Essentially, the credit score is the measure of the likelihood that you will be able to pay your bills. Your credit score is used by any agency interested in determining the level of risk they may be taking upon themselves by lending you money. Your rating will also be used in deciding how much money you will be loaned, and at which rate you will be expected to pay it back.
Credit scores are assessed by a number of independent rating agencies. These include FICO, NextGen, VantageScore and CE Score. FICO stands for Fair Isaac Corporation, and this organisation is probably the most well known in the U.S. The FICO measure is the one most often used in the consumer banking and credit industries. Depending on your assessment by FICO, or any of the other credit rating agencies, you will either be accepted or denied banking and other lines of credit. The most common areas where credit scores are relevant are in loans for mortgages, automobiles and consumer credit. Credit ratings for each of these types of loans may differ, being based on different risk factors, even though they are all referring to the one individual.
Other US agencies that calculate and publish credit ratings include Equifax, Experian and TransUnion. The old adage states that there are lies, damned lies and statistics, and the plethora of statistical credit measures that exist in the market is evidence of that. Most people will never encounter their individual credit rating scores, and will only know that the health of their credit rating if they are accepted or declined on a particular loan for which they have applied. While credit ratings are required by law to be free from bias on the basis of race, color, religion, nationality, sex or marital status, it is generally impossible to prove this and credit ratings are often held by the public at large with suspicion. However, in the absence of any better measure of the level of risk to which a borrower may be exposed, credit scores are likely to be with us until a better measure of credit worthiness is developed.
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