Understanding Your Credit Score By Ryan J Bell At Isnare.com Ezine Articles

Credit scores are mathematical expressions which are derived from statistical analysis of the positives and negatives of a person's credit files. The algorithm compares these data points against data collected from other credit reports to create a summary of the "credit-worthiness" of that person. Generally speaking, your "credit-worthiness" is a measure of how likely it is that you will repay your obligations on-time. Therefore, a lower credit score means you are less likely to repay or pay on time, and that you are bigger risk to a lender, so they will give you a higher interest rate in order to hedge their risk in lending to you.

Credit reports, which provide the information on which on your credit score is based, are sourced from credit bureaus (Experian, Transunion, and Equifax) who aggregate information sent by lenders about your loan amounts, payments, etc. The original, and most widely-accepted method of calculating credit scores was developed by the Fair Isaac Corporation, and is commonly referred to as a FICO score. This score is used especially by mortgage brokers, so those looking to buy a home should pay special attention to their FICO score.

Each of the three bureaus has worked with Fair Isaac to develop a credit scoring algorithm. Although each has different goals, and therefore slightly different calculation parameters, they are all produced by the Fair Isaac Risk Model. However, because of the differences in the scoring models, and differing information across the bureaus, credit scores often vary from one bureau to the next.

For instance, if your lender reports to only 2 out of 3 bureaus, then one of them will have no information on your loan. If this were to affect your credit score, you would have 2 scores based on similar information and 1 based on totally different information. Most likely, all three scores will be different anyway as they will be based on different models as well. A lender who views all three scores will most likely choose the middle of the three on which to base his analysis of risk.

American citizens are entitled to receive one free credit report per year. Consumers are often confused by the fact that this free annual report does not contain a credit score. The free report only contains your credit history (or 'credit identity') which allows you to see what negative or inaccurate information might be posted in your credit file.

Many states have enacted their own laws about credit reports which apply in addition to the federal law. Colorado residents, for instance, are entitled to a free copy of their credit report whenever negative information is added.

Not buying a home? Your credit score follows you to other places too!
Your credit score is used in some of the most unlikely places. Your score is not just used for credit cards, auto loans, and home mortgages. If you want a mobile phone, good insurance rates and even a job, it would benefit you greatly to have a favorable credit score.

A credit report is not only used to determine rates for mortgages or car loans. Your credit score can be factored into things like cell phone rates, insurance premiums, credit card rewards programs, and even job applications. Even if you never take out a large loan for home or car purchase, it is in your best interest to maintain a good credit score.

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