Credit score, what it is and how it is 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.

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

Defining the credit score

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

Credit ScoreThe most widely used system for calculating credit scores is known as FICO, which stands for Fair Isaac Corporation. There are several kinds 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 certain 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 institutions are always reviewing your score to change or improve the interest rates of a personal loan or the limit for a credit card.

How is the credit score calculated?

It is normal for a young person not to have a credit score due to the fact that they have not yet applied for any 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 if you are just starting out.
  • Credit applications. It's 10%. This category evaluates if 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 score

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

When it comes to home loans, car loans, and other major categories, FICO is used (90% of the time), which is the most popular. As we have seen, this evaluation is made up of several factors that lenders will review. In any case, the models related to credit history seek an objective way of estimating the risk of payment or non-payment.

Credit Score Assessment Chart

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

Range

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 average for the country, even so it is possible to receive approval.
670 to 739 Good This score is close to or slightly above the national average, which increases the odds of receiving a yes.
740 to 799 Very Good This score is above the national average, signifying that you are a reliable payer.
800 or more Excellent This valuation is well above normal, showing that you do not represent a risk.

For example, people who have a score of less than 640 are usually considered subprime or "risky" customers. 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.

Maintaining a good credit score is the first measure 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 put at your disposal various recommendations and advice so that you know how to manage your money.

En español: Puntaje de crédito, qué es y cómo se calcula