Unlocking the secrets of the
Credit Score

'Credit Score' is a term you'll hear very often in America. Simply put, its a number that represents your credit risk (i.e. how likely are you as an individual to pay back your loans). It is therefore intricately linked to your credit history - in fact, it is just a numeric expression of your credit history.

Why does America love talking of credit scores? Because credit scores are an easy, objective, standardized way in which lenders, banks and credit card issuers can 'evaluate' you. It helps them determine if they should give you a loan, to what credit limits and at what interest rate. The higher your score, the lesser the expected chance of a default and hence the lower the interest rate they'll charge you. Since credit scores directly impact your cost of obtaining credit, you can save a LOT of money by ensuring a high score.

Credit scores are calculated through a statistical analysis of the information contained in your credit report. Since credit reports are compiled separately by the 3 nationwide credit bureaus, and since these bureaus have slightly differing information in their files at any given point in time, your credit score will differ a little bit at each bureau. But the difference would not be huge and lenders would usually obtain all 3 scores, while determining your eligibility for a loan.

The mathematical formula behind the calculation of credit scores was invented by a company called Fair Isaac Corporation (FICO). That's why these scores are also called 'FICO scores'. To be fair, many other companies have now come up with their own mathematical formulas and today's credit scores are calculated in a variety of different ways, and known by different names. But in common parlance, a credit score still refers to a FICO score, since that's the oldest, most popular and most commonly used version.

FICO scores vary from 300 (the lowest you can get) to 850 (the highest you can get). Anything over 700 is considered good. 723 is the median score of people in America.

You don't have to do anything specific to get a high credit score. You don't have to pass an exam or anything. All you need is to maintain a healthy credit history and be cognizant of good 'credit habits'. Over time, your score will keep improving by itself.

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