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A credit score is a numerical index which represents an estimate of an individual's financial creditworthiness. It is based on a subset of the information in an individual's credit report. Lenders, such as banks and credit card companies, use credit scores to determine credit limits and interest rates.
The best-known credit score in the United States is the FICO score calculated using mathematical formulae developed by the Fair Isaac Corporation. The three major American credit-report agencies (Equifax, Experian and Trans Union) all use variations on this scoring formula under different names, the best-known of which are the Beacon score and the Emperica score.
FICO scores and its variants are designed to measure the risk of default, by taking into account various weighted factors:
- 35% punctuality of payment in the past
- 30% capacity used, i.e., ratio of current revolving debt (e.g. credit card balances) to total available revolving credit (e.g. credit limits)
- 15% length of credit history
- 10% types of credits used (installment, revolving)
- 10% amounts of credits applied for in the recent past
The above percentages are approximate. Current income and employment history do not influence the FICO score.
FICO scores range from about 300 to 850 and exhibit a left-skewed distribution with a median around 725. A score above 720 is considered to be "good credit," and a score below 600 is considered to be poor.
In accordance with the Freedom of Information Act (FOIA), people can access their credit scores if they wish (though usually at a cost), and many online services exist whereby people can check their scores over the Internet.
Free reports will be phased in during a nine-month period, rolling from the West Coast to the East beginning December 1, 2004. Beginning September 1, 2005, free reports will be accessible to all Americans, regardless of where they live.
Recently, some of the agencies which generate credit scores have also been generating insurance scores, which insurance companies then use to rate the quality of potential customers.
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