What Are Credit Scores?

Many first time applicants for credit accounts such as mortgages or car loans are exposed to their credit scores when they apply for credit and their salesperson reviews their credit report with them. We know that many people have asked the question: what are credit scores?

Credit scores are pretty simple to understand conceptually, but from a technical standpoint, they are difficult to actually figure out. Credit scores are a numerical measure or translation of the information found on your credit report. Information such as dates of when accounts were opened or closed, credit limits, credit balances, good and bad payment history, collection account details, judgment account details, prior bankruptcy information and many other items go into how your credit scores are figured out.

Credit scores were developed to take the guess work out of approving credit. Back in the day – say mid 1990’s and before – credit applications were solely approved based on the credit lender physically reviewing your credit application and making a judgment call or forming an opinion about whether you already had too much credit or whether you were a good risk etc. A lender’s opinion often had nothing to do with an applicant’s ability to pay back the loan – and some lenders faced problems of discrimination law suits for people seemingly getting denied credit because they didn’t fit into some sort of profile that the lender wanted to fit them into.

With the invention of credit scores in the 1990’s lender opinion and arbitrary decision making took a back seat to a more streamline, consistent and objective process for determining the credit worthiness of a credit applicant.

With this said, credit scores are derived from information found on your credit report based on your past to reflect how likely it is that you will repay your debt in the future. Typically you will have three credit scores associated with your credit report and most mortgage lenders use the middle of your three scores to determine if you can potentially qualify for a mortgage.