A credit score is a numerical expression derived from an analysis of an individual's credit history and credit report, used to estimate the relative likelihood that the individual will repay debts and meet other financial obligations. As a standardized and comparatively low-cost method of evaluating borrowers, credit scoring serves as a primary alternative to traditional forms of loan underwriting, enabling faster and more consistent credit decisions.

Lenders, such as banks and credit card companies, use credit scores to evaluate the risk of lending money to consumers. Lenders contend that widespread use of credit scores has made credit more widely available and less expensive for many consumers. Under the Dodd-Frank Act passed in 2010, a consumer is entitled to receive a free report of the specific credit score used if they are denied a loan, credit card or insurance due to their credit score.

Not all U.S. adults are scoreable under conventional credit scoring models. The Consumer Financial Protection Bureau estimates that approximately 26 million Americans have no credit record with any of the three major credit bureaus and are considered "credit invisible," while an additional 19 million have records too thin or too stale to generate a score. Together these groups represent roughly 45 million adults who may be unable to access conventional credit products or qualify for loans on standard terms. Credit invisibility disproportionately affects younger adults, Black and Hispanic consumers, and people in low-income neighborhoods.

History Before credit scores, credit was evaluated using credit reports from credit bureaus. During the late 1950s, banks started using computerized credit scoring to redefine creditworthiness as abstract statistical risk. The Equal Credit Opportunity Act banned denying credit on gender or marital status in 1974, along with race, nationality, religion, age, or receipt of public assistance in 1976. Credit scoring adoption accelerated to shield against discrimination lawsuits.

During the 1970s and 80s, the credit reporting industry relentlessly consolidated and moved aggressively into prescreening. The FICO score burst into public consciousness in 1995 when Freddie Mac had lenders use credit scoring for all new mortgage applications.

Credit scoring models

Although various methods of estimating creditworthiness existed before, modern credit scoring models date to 1958, when Bill Fair and Earl Isaac created Credit Application Scoring Algorithms, their first credit scoring system.

FICO score

The FICO score was first introduced in 1989 by FICO, then called Fair, Isaac, and Company. The FICO model is used by the vast majority of banks and credit grantors, and is based on consumer credit files of the three national credit bureaus: Experian, Equifax, and TransUnion. Because a consumer's credit file may contain different information at each of the companies, FICO scores can vary depending on which bureau provides the information to FICO to generate the score.

Makeup

Credit scores are designed to measure the risk of default by taking into account various factors in a person's financial history. Although the exact formulas for calculating credit scores are secret, FICO has disclosed the following components: Payment history (35%): Best described as the presence or lack of derogatory information. Bankruptcy, settlements, charge-offs, repossessions, foreclosures, and late payments can cause a FICO score to drop. Debt burden (30%): This category considers a number of debt-specific measurements. According to FICO there are six different metrics in the debt category including the debt to limit ratio, number of accounts with balances, the amount owed across different types of accounts, and the amount paid down on installment loans. Length of credit history or "time in file" (15%): As a credit history ages it can have a positive impact on its FICO score. There are several metrics in this category, most significantly the average age of the accounts on a report and the age of the oldest account. Types of credit used (10%): Consumers can benefit by having a history of managing different types of credit. Examples of types of credit include installment, revolving, consumer finance and mortgage.Is Paying Off the Mortgage Good for Our Credit? Credit Cards Q&A By Joan Goldwasser, Kiplinger's Personal Finance, October 2008 Recent searches for credit (10%): Hard credit inquiries or "hard pulls," which occur when consumers apply for a credit card or loan (revolving or otherwise), can hurt scores, especially if done in great numbers. Individuals who are "rate shopping" for a mortgage, auto loan, or student loan over a short period (two weeks or 45 days, depending on the generation of FICO score used) will likely not experience a meaningful decrease in their scores as a result of these types of inquiries, as the FICO scoring model considers all of those types of hard inquiries that occur within 14 or 45 days of each other as only one. Further, mortgage, auto, and student loan inquiries do not count at all in a FICO score if they are less than 30 days old. While all credit inquiries are recorded and displayed on personal credit reports for two years, they have no effect after the first year because FICO's scoring system ignores them after 12 months. Credit inquiries that were made by the consumer (such as pulling a credit report for personal use), by an employer (for employee verification), or by companies initiating pre-screened offers of credit or insurance do not have any impact on a credit score: these are called "soft inquiries" or "soft pulls", and do not appear on a credit report used by lenders, only on personal reports. Soft inquires are not considered by credit scoring systems.

These percentages are based on the importance of the five categories for the general population. For particular groups—for example, people who have not been using credit long—the relative importance of these categories may be different.

The makeup factors are limited to the individual's past (and continuing) behavior on credit. Contrary to common misconception, other financial factors such as age, employment status, assets, or income are not accounted. However, lenders are not prohibited from asking about and accounting these factors for particular lending considerations.

Getting a higher credit limit can help a credit score. The higher the credit limit on the credit card, the lower the utilization ratio average for all of a borrower's credit card accounts. The utilization ratio is the amount owed divided by the amount extended by the creditor and the lower it is the better a FICO rating, in general. So if a person has one credit card with a used balance of $500 and a limit of $1,000 as well as another with a used balance of $700 and $2,000 limit, the average ratio is 40 percent ($1,200 total used divided by $3,000 total limits). If the first credit card company raises the limit to $2,000, the ratio lowers to 30 percent, which could boost the FICO rating.

There are other special factors that can weigh on the FICO score. Any money owed because of a court judgment, tax lien, etc., carries an additional penalty, especially when recent. Having one or more newly opened consumer finance credit accounts may also be a negative.

Ranges There are several types of FICO credit score: classic or generic or general-purpose score, industry-specific scores (bankcard score, auto score, mortgage score, personal finance score, and installment loan score), XD score, NextGen risk score, and UltraFICO score. The classic FICO credit score (named FICO credit score) is between 300 and 850, and 59% of people had between 700 and 850, 45% had between 740 and 850, and 1.2% of Americans held the highest FICO score (850) in 2019. According to FICO, the median FICO credit score in 2006 was 723 and 721 in 2015. The average FICO Score 8 in the US was 710 in 2020 and 716 in April 2021. The FICO bankcard score, FICO auto score, FICO personal finance score, and FICO installment loan score are between 250 and 900. The FICO Mortgage Score and FICO Score XD 2 are between 300 and 850. Higher scores indicate lower credit risk."What Is the Range for Credit Scores?" NerdWallet, October 28, 2016 Experian classifies FICO credit scores lower than 580 as very poor, 580–669 as fair, 670–739 as good, 740–799 as very good, and 800–850 as exceptional. Equifax considers FICO scores lower than 580 as poor, 580–669 as fair, 670–739 as good, 740–799 as very good, and 800–850 as excellent. Individuals with FICO scores less than 670 are seen as subprime borrowers.

Each individual actually has over 60 credit scores for the FICO scoring model, as each of the three national credit bureaus (Equifax, Experian and TransUnion) has its own database, but the most used are 40. Data about an individual consumer can vary from bureau to bureau. FICO scores have different names at each of the different credit reporting agencies: Equifax (Beacon), TransUnion (FICO Risk Score, Classic) and Experian (Experian/FICO Risk Model). There are several active generations of FICO credit scores: FICO 98 (1998), FICO 04 (2004), FICO 8 (2009), FICO 9 (2014), FICO 10 and FICO 10T (2020). A new type of FICO score named UltraFICO score was released in 2019. The FICO 95 credit score released in 1995 and Equifax FICO 98 scores are no longer in use. The FICO Score XD is made with alternative data and was released in 2016. Mortgage lenders use EX FICO Score 2, EQ FICO Score 5 and TU FICO Score 4, but not a real FICO Mortgage Score. Consumers can buy their FICO scores plus credit report for Equifax, TransUnion, and Experian from the FICO website (myFICO), and they will get their FICO score 8, FICO Bankcard Score 8, FICO Auto Score 8, FICO Score 9, FICO Auto Score 9, FICO Bankcard Score 9, and other FICO scores (1998 and 2004 versions). Individuals can get up to 28 FICO scores (10 EX, 9 EQ, 9 TU) on myFICO. Consumers also can buy their FICO Score 8 for Equifax in the website for that credit bureau, and their FICO Score 8 for Experian on its website. Anyone can register and get their free EX FICO score 8 with Experian CreditWorks Basic. Other types of FICO scores cannot be obtained by individuals in a personal capacity, only by lenders. Some credit cards issued by banks and some credit unions offer a free FICO score several times per year to their cardholders.

FICO NextGen Risk Score The FICO NextGen Risk Score is a scoring model designed by the FICO company for assessing consumer credit risk. This score was introduced in 2001 (FICO score NG1), and in 2003 (FICO score NG2) the second generation of NextGen was released. In 2004, FICO research showed a 4.4% increase in the number of accounts above cutoff while simultaneously showing a decrease in the number of bad, charge-off and bankrupt accounts when compared to FICO traditional. FICO NextGen score is between 150 and 950.

Each of the major credit agencies markets this score generated with their data differently: Experian: FICO Advanced Risk Score Equifax: Pinnacle TransUnion: FICO Risk Score NextGen

FICO SBSS The FICO Small Business Scoring Service (SBSS) score is used to evaluate small business credit applicants. This score can evaluate the personal credit report of a business owner along with the business credit report of the business itself. Financial information of the business may be evaluated as well. The score range for the FICO SBSS score is 0–300. A higher score indicates less risk. Applications for SBA 7(a) loans for $350,000 or less will be prescreened using this score. A minimum score of 140 is needed to pass this prescreen, though most lenders require scores of 160 or more.

VantageScore