How Credit Scoring Works

Lenders Don't always have time to pore through credit reports when making determinations about the credit-worthiness of applicants. That's why they use credit scoring to quickly and accurately assess the risk associated with an applicant. Credit scoring is a statistical method that measures the likelihood you will pay back a loan. Scores range from 350 to 950, 350 being the highest risk and 950 being the lowest. There are several different types of scores, though the most common is the score developed by Fair Isaac & Company, Inc. (FICO).

Credit scores only take into account information contained in your credit profile, and do not consider information like your income, savings, or down payment amounts. More personal information like gender, race, marital status, and nationality are also not included. Past delinquency, bad payment record, your current level of debt, the length of your credit history, the types of credit you have, as well as, the number of inquiries about your credit are all factors considered in your score. Your score considers both positive and negative credit behavior. Missed payments can lower your score, but establishing a pattern of paying on time can improve your score.

Credit scores break down by percentage as far as what is considered in computing your score. 35 percent of your score is determined by your payment history; 30 percent by your current level of indebtedness as compared to your highest level; 15 percent by the amount of time you have been using your credit; 15 percent by the types of credit available in the report, including debit accounts, revolving loans and installment accounts; and five percent by your pursuit of new credit, meaning the number of inquiries about your credit.