What Is A Credit Score? – How Is A Credit Score Calculated?

This article will help you to understand what a credit score is, how it is calculated how it is applied and how it affects your ability to obtain credit, giving you more information to learn how to rebuild credit.

Definition
A credit score is a number based on a statistical analysis of a person’s credit files to represent the creditworthiness of that person. A credit score is mainly based on credit report information usually obtained from credit agencies.
Credit Scaling
Grades ranging between 400 and 850 are assigned to individuals based on their repayment history. Typically, an individual will have three scores, one from each of the three major credit agencies: Experian, Transunion, and Equifax. Income is not considered by the major credit agencies when calculating a credit score.

Credit Score Application
Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system.
There are different methods of calculating credit scores. In addition, many large lenders, including the major credit card issuers, have developed their own proprietary scoring models.
The most popular technique used is logistic regression to predict a binary outcome, such as bad debt or no bad debt. Some banks also build regression models that predict the amount of bad debt a customer may incur. Typically, this is much harder to predict, and most banks focus only on the binary outcome.
Who Uses Credit Scoring?
Credit scoring is not limited to banks. Other organizations, such as mobile phone companies, insurance companies, employers, landlords, and government departments employ the same techniques. Credit scoring also has a lot of overlap with data mining, which uses many similar techniques.
It is very difficult for a consumer to know in advance if they have a high enough credit score to be accepted for credit with a particular lender. This is due to the complexity and structure of credit scoring, which differs from one lender to another.
Credit Scoring Confidentiality
Also, lenders do not have to reveal their credit scoring methods, nor do they have to reveal the minimum credit score required for the applicant to be accepted. Simply due to this lack of information to the consumer, it is impossible for him or her to know in advance if they will pass a lender’s credit scoring requirements.
If the applicant is declined for credit, the lender is also not obliged to reveal the exact reason why.
Americans are entitled to one free credit report within a 12-month period from each of the three credit bureaus but are not entitled to receive a free credit score. Credit scores are available as an add-on feature of the report for a fee.