A credit score is a number that is used by creditors to decide whether to give you credit. It is supposed to help predict how likely it is that you will repay a loan and make the payments on time.
There are different types of credit scores, but the term usually refers to a score created by one of the "Big 3" credit bureaus (Experian, Equifax, and TransUnion).
A credit score is usually a number between 300 and 850. The higher the number, the better your credit rating, and the easier it will be for you to get credit. The score is based on a variety of factors that are contained in your credit report, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and how long your accounts have been open.
How is the number determined?
To determine credit scores, credit bureaus use credit scoring models. These models take into account information on your credit report and assign weights to various types of information, such as history of on-time payments, length of credit history, and amount of credit you currently have outstanding. The model takes this information into account and comes up with a number - your credit score. Higher numbers are better, indicating people that are more likely to repay a debt on time.
A creditor also can develop its own internal system for generating scores. For example, a creditor could randomly pick a group of its customers, then analyze this group to decide what factors it thinks relate to whether someone will pay on time. Each of these factors would then given a weight depending on how strongly the factor shows who would be a good credit risk. These internally developed scores are usually not what is meant by the term "credit score."
A credit scoring system may not use certain characteristics as factors. These characteristics include race, sex, marital status, national origin, and religion.
Use your credit score as a general guide to understand your financial health. Your credit score helps measure the steps you take to improve your credit history. Improving your credit report will improve your credit score.
Since many lenders use credit scores as one factor in making loan decisions, knowing your credit score and understanding how it is computed can be helpful when you apply for a loan.
More information is available here on the importance of Your credit history.
Updated: July 2017