Our credit score, a three-digit number known as a FICO score, is key in determining whether or not we’ll get a loan or a new line of credit and how much interest we’ll pay — the higher our score, the better our chances of getting a low-interest loan.

Despite the important role these three digits play in our ability to obtain credit, some 50 percent of consumers polled in a recent survey had limited knowledge of what a credit score means, according to a survey conducted jointly by the Consumer Federation of America and Washington Mutual (“Consumer Understanding of Credit Score Remains Poor,” July 19, 2007).

What FICO Is and What It’s Used For

The formula used to calculate FICO, an acronym for Fair Isaac Corporation, was determined by Bill Fair, an engineer, and Earl Isaac, a mathematician, over 50 years ago when the two devised an algorithm for an automated credit scoring system.

Scores can range from 300 to 850 and are generally determined by calculating the percentages of five different categories: your credit payment history (35 percent), the total amount of debt you owe (30 percent), the length of your credit history on all of your accounts (15 percent), the number of new lines of credit you have recently opened (10 percent), and the most common types of credit you use (10 percent).

Fair Isaac calculates a FICO score based on the data provided by each of the three major credit bureaus, Experian, Equifax, and TransUnion. We may see a difference in the credit score we receive from each credit bureau — sometimes up to a 50-point difference from one bureau to another — because bureaus collect data at different times of the month.

Most lenders consider a score of 760 to be “a very good credit risk,” writes Wendy Kaufman of National Public Radio (“Credit Scores Even More Key In A Tight Economy,” Nov. 24, 2008).

Mike Fratantoni, a senior research director at the Mortgage Bankers Association, says “Credit scores are very powerful predictors of consumers’ future [bill-paying] performance” (“Anatomy of a Credit Score,” BusinessWeek, Nov. 28, 2008).

Lenders, insurance companies, cell-phone providers, utilities companies, landlords, and even prospective employers may ask for permission to see our FICO score and our credit report to help determine if we’re a trustworthy customer, renter, or employee.

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