A good credit score can save consumers money with lower interest rates because lenders use it to determine credit risk. Lenders use different tools to determine risk; the most widely used tool is the FICO Credit Scoring system. Maintaining a satisfactory credit score is important because lenders consider this an important tool for determining credit risk.
According to the Fair Credit Reporting Act, the definition of a credit score is “a numerical value or a categorization derived from a statisticaltool or modeling system used by a person who makes or arranges a loanto predict the likelihood of certain credit behaviors, including default (and the numerical value or the categorization derived from such analysis may also be referred to as a “risk predictor” or “risk score”); and does not include any mortgage score or rating of an automated underwriting system that considers one or more factors in addition to credit information, including the loan to value ratio, the amount of down payment, or the financial assets of a consumer; or any other elements of the underwriting process or underwriting decision” (FCRA §609(f) (2)). Although there are different types of credit scoring models, the most widely used is the FICO scoring system, created by Fair, Isaac, and Company. The factors that make up this score are as follows: payment history, new credit, amounts owed, length of credit history, and types of credit used. The length of time used for creating the score is the previous six years, although lenders use some information such as a bankruptcy longer (Goff, 2006). By law, a credit score cannot consider race, color, religion, nationality, sex, or marital status. It also cannot consider whether a person receives public assistance of any kind. FICO scoring ranges from 300-850. The median FICO score in America is 723. A FICO score above 760 is excellent,