From Justin Pritchard,
Your Guide to Banking / Loans.
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A credit score is just a number. The credit score tells lenders how likely you are to default on a loan. By understanding how credit scores work, you can figure out what lenders are looking for and how you can improve your credit score.

Credit Score Basics

Credit scores are designed to make it easy on lenders. They need to decide whether or not to approve your loan. Instead of manually reading through your credit reports, they can just look at a number: your credit score.

The number is generated by a computer program that reads through your credit reports. It slices and dices the data stored at the credit bureaus and spits out a number. Just like a human, the computer program is checking to see if you've borrowed in the past and if you generally pay as agreed.

• How Credit Bureaus Work
• What Information is Stored at Credit Bureaus?
• How to Order Your Free Credit Reports

Lots of Credit Scores

The programs that generate your credit score are complex, and their designs are closely guarded secrets. However, we know that they generally look for proof that you're a seasoned, responsible borrower.

The most popular credit score is the FICO credit score, from the Fair Isaac Corporation. They share some general information on what the score looks at and how it is calculated.

• How the FICO Credit Score Works

Other credit scores exist; which might extend the FICO credit score, or they might be custom built for a lender’s particular needs. For example, a lender may want to include your income in a credit scoring model. Likewise, some peer to peer lending sites create "credit grades" that are easier for lenders to understand.

Just be aware that there are many different credit scoring models out there. Even your FICO score will differ among the credit reporting companies because they all have different information on you.

Approving Loans

Credit scores do not determine whether or not your loan is approved. They are simply numbers generated from your credit report. Your lender sets standards on which credit scores are acceptable and makes the final decision.

To improve your credit scores, you have to show that you're a seasoned, responsible borrower. If you build your credit files with positive information, your credit scores will follow.

• How to Improve Credit Scores

Sometimes your credit report contains errors. When this happens, you can miss out on opportunities that you otherwise deserve. It's essential that you get those errors corrected in case anybody is asking about your credit. The process is tedious, but well worth your time.

• Errors - How to Fix Your Credit