What is a credit score and how does it affect your life?

Your credit score is a number based on the information in your credit file that helps determine your likelihood of paying back a loan on time.  

Although there are several scoring methods, the score most commonly used by lenders is known as a FICO® because of its origins with Fair Isaac and Company. Fair Isaac is an independent company that came up with the scoring method and software used by banks and lenders, insurers and other businesses. Each of the three major credit bureaus (Experian, Equifax and TransUnion) worked with Fair Isaac in the early 1980's to come up with the scoring method.

The three national credit bureaus each have their own version of the FICO score with their own names. Equifax has the Beacon system, TransUnion has the Empirica system, and Experian has the Experian/Fair Isaac system. Each is based on the original Fair Isaac FICO scoring method and produces equivalent numerical results for any given credit report. Some lenders also have their own scoring methods. Other scoring methods may include information such as your income or how long you've been at the same job.

FICO Scores are calculated from a lot of different credit data in your credit report. This data can be grouped into five categories as outlined at left. The percentages in the chart reflect how important each of the categories is in determining your score.

It is important that you understand what makes up your credit score and what you can do to improve it.  By understanding what lenders view as good credit management, you can build a strong credit history, improve your score and qualify for better loan terms.