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Credit Score Analysis

The process of evaluating an individual's or a company's credit score to determine their creditworthiness

What is Credit Score Analysis?

Credit score analysis is the process through which different companies evaluate an individual’s or a company’s credit score to help determine how creditworthy the entity is. A credit score is significant because it takes into account how many times credit was used and how efficiently it was repaid.

 

Credit Score Analysis

 

Summary: 

  • Credit score analysis refers to the process of reviewing an individual’s (or company’s) history of borrowing funding and how efficiently they repay it.
  • Credit scores are important for lenders because they reveal how capable an applicant is of taking on debt and repaying it in an efficient and timely way; this, in turn, reveals how risky it is for the lender to extend the applicant a loan or line of credit.
  • FICO credit scores range from 300 to 850; the lower the credit score, the worse the applicant is at borrowing and repaying debts. Conversely, the higher the credit score, the better the individual is at borrowing and repaying debts.

 

How Credit Scores are Used

Credit scores are used by lending institutions – banks, mortgage brokers, large-scale lenders – and even places like car dealerships in order to better understand if an applicant is worthy of a new line of credit (or loan). Such institutions also use credit scores to help determine what the exact nature of the line of credit should be.

The higher the credit score, the more an applicant can hope to get in terms of a line of credit (or loan), and the better the terms (which include such things as the interest rate, size and frequency of repayments that need to be made, and the total length of time available to make repayments).

 

FICO Scores

Companies that assemble and issue credit reports use different types of credit scores. The most common are FICO scores, so named because the concept was originally started by the Fair Isaac Corporation. Almost all lending institutions use FICO scores to help determine how creditworthy an applicant is.

However, in recent years, alternatives to FICO credit scoring have gained popularity among lenders. Most alternative credit scoring methods put more emphasis on how well an applicant manages to pay their standard monthly expenses such as rent/mortgage payment and electricity, as opposed to merely looking at their credit or loan history.

FICO scores range from 300 to 850. Let’s break down what the ranges are and what the scores mean to lenders:

  • 300–579 (Poor) – As of 2018, approximately 16% of the US population falls into this category; it means the applicant has a substantial amount of outstanding debt.
  • 580–669 (Fair) – About 17% of the population falls into this category; applicants in this bracket have a decent amount of debt but are working to repay it.
  • 670–739 (Good) – About 21% of the population falls into this bracket; individuals in this group have been given lines of credit and have actively worked to repay it in a timely way.
  • 740–799 (Very Good) – At 25%, the highest percentage of the population falls into this group; individuals in this bracket get lines of credit and repay their debts in a timely and efficient way.
  • 800–850 (Excellent) – An estimated 21% of the population falls into this bracket; applicants in this group are excellent at borrowing money and repaying it quickly, without accumulating excessive amounts of debt.

 

Related Readings

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Credit Administration
  • Credit Analyst Job Description
  • Fannie Mae
  • Personal Finance