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Credit Scores: What They Are and How They Work

Credit Scores: What They Are and How They Work

Part 1 of 4.  As an individual consumer, you are well aware that your credit score plays a key role any time you apply for any type of loan, such as a credit card, mortgage, or car loan.  Credit scores are a way that Lenders reduce your past history of borrowing money to a single number that represents how well an individual has used credit in the past.  Whether or not you believe that number actually reflects your real ability to borrow in the end does not matter — lenders use these scores to help them decide whether to give an applicant a new loan.

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To better understand what these scores are and how they affect you, we’re going to take a closer look at them over the next series of posts.   We will look at how these scores are created, how much control you can have over what they look like, and how key life events like bankruptcy and foreclosure affect them.

Credit Reporting Agencies

There are three consumer credit reporting agencies, or credit bureaus: TransUnion, Experian, and Equifax.  Each of these companies creates consumer credit reports on nearly every person who has ever used or applied for credit. These credit reports contain specific details about each person’s history with credit that the bureaus then use to calculate credit scores.  What goes into these reports and the bureaus obligation to keep that information accurate is governed by Federal law – the Fair Credit Reporting Act.  Consumers have the right to correct their report, and can sue credit bureaus that fail make those corrections.   Federal law also allows consumers to review each of their three credit reports for free once every year.   Beware of scam websites that look like “free” credit report sites.  The official site to obtain free reports is

What Makes Up a Credit Score

Information is reported to the consumer credit bureaus by creditors, and while not all creditors report, and not all creditors report to all bureaus, the information across your three credit reports will generally be the same.  Your report contains the credit such as loans and credit cards, public record items like judgments, foreclosures and bankruptcies, and accounts that have been referred to collection.  The standard credit score, and the one used by most banks, is a FICO score.  The FICO scale generally runs from 300 to 850, and the median score is a little above 700.

Credit bureaus rely on different factors in creating score, they keep the criteria secret and will not disclose precisely what they are and how they are weighed.  The key factors include

  • Your history of timely payments.
  • The amount of available credit you currently use.
  • The different types of credit you currently use.
  • How long you’ve had each of your loans.
  • How many loans you’ve recently applied for.
  • Whether there are public record items such as bankruptcies and foreclosures on your record.
  • Whether you have had accounts referred to collect.


The next posts will take a  look at what affects your score, the impact bankruptcy can have and steps you can take to improve your score.

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Jim White
Jim White

Jim White helps people and companies facing serious financial injury. He is a Board Certified Specialist in Business Bankruptcy as well as an experience litigation attorney who has successfully taken on banks, large financial institutions and other corporations in “David v. Goliath” cases.