credit scoring model
The algorithm used to calculate a credit score from credit report data — FICO and VantageScore are the most common.
Example
“Different lenders use different credit scoring models which is why scores vary between institutions.”
Memory Tip
MODEL — the formula behind the number. Different models, different results.
Why It Matters
Your credit score significantly impacts your financial life because lenders use it to decide whether to approve you for loans, credit cards, and mortgages, and what interest rates they will charge you. A higher score can save you thousands of dollars in interest over time, while a lower score may result in higher borrowing costs or outright loan rejections.
Common Misconception
Many people believe that checking their own credit score will lower it, but this is false because checking your own score is a soft inquiry that does not affect your credit. Only hard inquiries from lenders when you apply for credit can temporarily impact your score by a few points.
In Practice
Imagine two people applying for a 30-year mortgage on a 300,000 dollar home with the same loan terms, but one has a FICO score of 750 while the other has a score of 650. The person with the 750 score might qualify for a 6.5 percent interest rate while the person with the 650 score gets approved at 8.0 percent, resulting in roughly 80,000 dollars more in total interest paid over the life of the loan.
Etymology
From Fair Isaac Corporation's mathematical model developed in 1989.
Common Misspellings
Check your credit score free — no impact
Related Terms
More in credit
Other credit terms you should know
See Also
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