What is the score or credit score and how is it calculated

Among the requirements that you must present when you want to apply for a personal loan, a credit card or a mortgage, are your qualifications as a responsible person.

Article content

1. Defining the credit score
2. How is the credit score calculated?
3. Types of credit scores
4. Credit score assessment table

As you well know, in the United States, reputation is ahead, especially when dealing with financial institutions. One of those unavoidable requirements is the score or credit score, which we will review further.

Defining the credit score

As its name implies, the credit score refers to an evaluation number that tells lenders, banks and entities, the probability that you pay on time. In general, the value range for this qualification is between 300 and 850. The higher it is, the greater opportunities you will have of obtaining the product you want to request and the better conditions you will obtain.

The most used system to calculate the credit score is known as FICO, which are the acronyms for Fair Isaac Corporation. There are several classes of qualifications that we will see later, but the one mentioned is the most used. This data saves institutions a lot of time when evaluating and, in a way, eliminates subjective assessments related to gender, race, among others.

This reference is also crucial when paying the initial fee for basic services, buying a cell phone or renting a house / apartment. On the other hand, lenders or financial entities are always reviewing your score to change or improve the interest rates on a personal loan or the limit for a credit card.

How is the credit score calculated?

It is normal for a young person to not have a credit score because they have not yet applied for some type of financing before. However, there are other sources that can be used to determine the viability of a loan. If this is not your case, the factors that are taken into account for the score are the following:

• Payment history. It represents 35% and varies according to the compliance you have had when paying your commitments.
• Current debt. It is 30% of the estimate, being important to be below the acceptable limit (35% of your income).
• Time handling loans. It consists of 15% and consider if you have a long payment history or are just getting started.
• Credit applications. It is 10%. This category evaluates whether you have applied for several loans lately and how often.
• Types of financing. It also consists of 10%. This takes into account the fact that your history includes a "healthy" mix of products, such as a personal loan, a mortgage, a car loan, credit cards, among others.

Types of credit scores

Interestingly, in the US you are going to have several FICO credit scores. In fact, you get one for each model associated with the most important credit bureaus in the country: TransUnion, Equifax and Experian. This makes it relevant to know the kind of score that you are using or that apply to you when it comes to some financing that you are considering.

For home loans, auto credit, and other major categories, the FICO (90% of the time), which is the most popular. As we have seen, this assessment is made up of several factors that lenders will review. In any case, the models related to the credit history look for an objective way to estimate the risk of payment or non-payment.

Credit score assessment table

To better understand the range of what is considered good or bad, we leave you a descriptive table:

Rank	Evaluation	Description
<580	Poor	This score is below the national average, showing that you are a risky customer.
580 to 669	Regular	This assessment continues to be lower than the country's average, even so it is feasible to receive approval.
670 to 739	Good	This rating is close to or slightly above the national average, which increases the odds of receiving yes.
740 to 799	Very good	This score is above the nation's average, meaning you are a reliable payer.
800 or more	Excellent	This valuation is well above normal, showing that you do not represent a risk.

As an example, people who have a score lower than 640 are usually considered as subprime or "risky" clients. For this reason, banks and other institutions offer subprime mortgages with higher rates than conventional ones, with the intention of covering their backs for the risk they are taking. As a result of this circumstance, the entities could ask you for a co-signer or give you a shorter term.

Maintain a good credit score It is the first measure that you should consider if you hope to obtain significant financing to improve your quality of life. In the search engine / comparator we emphasize the importance of having good personal finances to avoid financial habits. That is why we offer you various recommendations and tips so that you know how to manage your money.