What is a credit score? Well it’s a mathematical analysis of a person’s credit worthiness that translates into risk to a potential lender. Many lenders use a credit score to determine if a loan should be issued and if so what the interest rate should be. This is all based on the risk to the lender. The first thing that is needed to compile a credit score is credit information.

In the United States there are three major three major credit bureaus that maintain credit information they are: Experian, TransUnion and Equifax. Each of these companies offers its own credit score. Experian’s is called PLUS score, Equifax calls theirs ScorePower and the TransUnion credit score.  There are also two other credit scores that are commonly used.

The first and most common is the Fair Issac Corporation score which is more commonly known as a FICO score.  The FICO score ranges from 300-850. The FICO score is the most widely used throughout the world and is available from all of the major credit bureaus.

The second is a called a VantageScore. VantageScore was developed by the three major credit bureaus to compete with the FICO score. The VantageScore ranges from 501-990. Only in use since 1996 it has yet to bee seen if it will seriously compete with the FICO score. The credit bureaus have advertised that VantageScore will more accurately predict potential risk to a lender.

Now that we know what a credit score is how is it calculated?

While the exact mathematical model used to make up the score isn’t know,  it’s pretty easy to see what would have a positive or negative impact on a credit score. Below information is from the VantageScore website on what makes up your credit score.

Payment History: Repayment behavior (satisfactory, delinquency, derogatory)
Credit Utilization: Percentage of credit amount used/owed on accounts
Balances: Amount of recently reported balances (current and delinquent)
Depth of Credit: Length of credit history and types of credit
Recent Credit: Number of recently opened credit accounts and credit inquiries
Available Credit: Amount of credit available

It’s a common misconception that you can get a free credit score every year. While it is true you can get a free credit report annually from Annualcreditreport.com if you want to see your credit score it will cost you an additional fee. Still, getting your credit report is very important to ensure that the data used to make up your credit score is accurate.