Many people do not know what a credit score is or how it is calculated, but by learning this you can better understand how it affects your everyday life. The most used credit score was developed by a financial firm, Fair Isaac; it is also known as the FICO score. Essentially, your credit score allows lenders to judge if they should give you a line of credit or a loan and how likely you could pay back that credit or loan. Your credit score also tells lenders your risk. Before credit scores came onto the financial scene in the 1980s, there was little to no bar of measurement in determining your financial risk. It was completely dependent on your loan officer or the credit card company offering you credit.

The score ranges from about 500 to 800. 678 is the average score for Americans. If your score is lower than this, you may have difficulty getting lines of credit or a loan. If you are able to get credit or a loan, your interest rate may be higher if your score is lower than average. A good credit score is essential in America. Some apartments will not rent to you if you have a lower credit score. It will also be hard to obtain financing for a vehicle, and some employers complete a credit check before they hire any employees, to see how responsible the employees are with their lives.

Your credit score is generated by complex statistical models using different parts of your credit report, such as how many credit cards you have, the balances on those cards, any late payments, etc. In reviewing your current and past history, the model determines how much risk you have in the future. A new score is generated each time you or a lender pulls your credit report since the various parts of your credit report are constantly changing. There are three major credit reporting agencies, each of which has their own methods for reading your credit report. Because of this, your score may vary depending on the agency you use to pull your credit score.

More recently, a new credit score has been introduced into the market. Developed by the national credit reporting agencies, VantageScore follows the common academic scale by assigning a score to a letter. If you have an "A" VantageScore, you are in the highest credit score category. An "F" score ranges from 501 - 600. There is information on the agencies' web sites explaining the different factors that determine your VantageScore, and what percentage each factor plays into the score.

With this new credit score, there will be some change in how credit scores are reported, but many are unsure of how and when. At the moment, the FICO score is still the most widely used credit score. Learn more about how your credit score is calculated to decide the best course of action for establishing good credit.