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Credit risk score

What is a credit risk score?
A credit risk score is a statistical summary of the information contained in a consumer's credit report. The most well known type of credit risk score is the Fair, Isaac and Company (FICO) score. Sophisticated mathematical processes calculate the score by assigning numerical values to various pieces of information in the credit report. Credit bureaus provide risk scores to credit grantors who use them to objectively evaluate an applicant's credit-worthiness. The score itself is relative and will be viewed differently by creditors depending on numerous factors, including the creditor's risk level, marketing goals, and business practices. Your risk score will change over time as your credit history develops.

FICO scores
FICO scores are an important factor in the decision whether or not to offer credit, especially when you apply for a mortgage. The scores range from 300 to 850 points, with 640 being an average score, but these numbers mean little on their own. They become meaningful and useful within the context of a particular lender's own cutoff points and underwriting guidelines.

In general, you are likely to be considered a better credit risk if your FICO score is high. Under mortgage lending guidelines, for example, a score of 650 or above indicates a very good credit history, and a score above 720 is considered an A and will qualify you for top rates from most lenders.. People with scores above 650 will usually find obtaining credit quick and easy, and will have a good chance to get it on favorable terms.

Scores between 620 and 650 (average FICO scores fall into this range) indicate basically good credit, but also suggest to lenders that they should look at the potential borrower to assess any particular credit risks before extending a large loan or high credit limit. People with scores in this range have a good chance at obtaining credit at a good rate, but may have to provide additional documentation and explanations to the lender before a large loan is approved. This means that their loan closing may take longer, making their experience more like that of borrowers in the days before credit scoring, when every individual was researched.

A score below 620 may prevent a borrower from getting the best interest rates, as they may be considered a greater credit risk--but it does not mean that they can't get credit. The process will probably be lengthier and, as noted, the terms may be less appealing, but often credit can still be obtained.

What factors are considered in determining my score?
Fair Isaac uses a number of factors to determine a consumer's creditworthiness. The score deals solely with a borrower's financial information and doesn't consider place of residence, age, race, sex or nationality. It does, however, consider many different factors, as the following graphic depicts.

fico factors

How does credit scoring benefit me?
The widespread use of credit scoring such as the Credit Bureau Scores developed using the FICO model allows for speedy, objective analysis of credit histories. This means that borrowers who score well can get loan approval or credit almost instantly--something unheard of in years past. It also means that borrowers who once might have experienced problems with individual lenders' prejudices are less likely to do so. Because it is objective and based on large volumes of verified statistical data, credit scoring brings a new level of fairness to the credit-granting process.

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