Credit Score Range - What is a Good Credit Score

In the US, the three credit bureaus compute credit scores based on the credit scoring model developed by the Fair Isaac Corporation. FICO is the acronym for Fair Isaac Corporation. Hence, the scores developed by the credit bureaus, viz. Experian, TransUnion, and Equifax are also known as the FICO scores. In addition to developing the first credit scoring system, in the year 1958, Fair Isaac Corporation is also the largest provider of consumer credit scoring models. At any point in time, a person has a credit score computed by each of the three bureaus. These scores may vary depending upon the model used.

Credit scoring is a statistical technique that is used to assess the prudence of extending credit to a borrower. It determines the extent to which the lender may stretch his/her purse strings. According to the Equal Credit Opportunity Act, a credit scoring model cannot incorporate the following factors: race, sex, marital status, nationality and religion. If the model gives weight to age, it must ensure that older applicants are not discriminated on the basis of age. Credit bureaus are believed to assign the following weights to factors while calculating credit scores: 35% to previous credit performance, 30% to the level of current indebtedness, 15% to the use of time credit, 15% to the types of credit available and 5% to any new credit that is availed. Hence, a credit score is calculated on the basis of factors that can be expressed in numerical terms in order to eliminate the question of bias.

All scoring models have a range. Generally, if one scores poorly, one can expect to be in the lower end of the range. Generally, a person's credit score or the FICO score is a number between 300 and 850. Range is a measure of dispersion and is defined as the difference between the maximum and the minimum value. Since a credit score ranges between 300 and 850, FICO scores have a range of 550.

Interpreting Credit Scores

Generally, a person whose credit score lies in the lower end of the range will find it difficult to procure loans at a reasonable rate of interest. A good credit score is especially useful when it comes to getting a mortgage on the house or for procuring auto loans. A score of 350 is indicative of high credit risk while a score close to 850 presents the likelihood of the credit, that was extended, being repaid as agreed.

Prime: A credit score that ranges between 680 and 850 is considered a good score. A borrower with a credit score in the aforementioned range is known as a prime borrower. The borrower will have no difficulty in seeking loans and can hope to avail a loan/mortgage at a low rate of interest provided the borrower's debt to income ratio is favorable. This ratio indicates the ability of the borrower to repay the borrowed sum.

Sub-Prime: Generally, a score in the range of 620-679 will make one a sub-prime borrower. A sub prime borrower is charged a higher rate of interest on loans as compared to a prime borrower. Before the housing market crashed, it was possible for sub-prime borrowers to get a mortgage loan at a low variable rate of interest. However, in the present situation, a sub-prime borrower will find it impossible to avail a loan with a low APR (annual percentage rate).

Shafted: A score between 620 and 560 may force a person to put up additional collateral or security to avail a loan at a reasonable rate of interest. A credit score that is below 560 may force a person to approach a hard money lender on account of being jilted by the conventional lenders.

Before the housing market crashed, a sub-prime borrower could have easily availed a variable rate mortgage loan at a low initial rate of interest. This floating rate of interest was based on the prime rate. Once the prime rate escalated, the borrower's interest rate gathered an upward momentum leaving the sub-prime borrower in the unenviable position of being unable to repay the loan. Refinancing was also ruled out once the home prices stated falling. Lending to the sub-prime borrower not only affected the lender but also the borrower whose credit score was further damaged on account of foreclosure.