With the cost of borrowing money to buy a home or a car inching ever higher, understanding who gets access to credit, and at what interest rate, is more important for borrowers’ financial health than ever. Lenders base those decisions on the borrowers’ credit scores.

To learn more about credit scores, The Conversation consulted with two finance scholars. Brian Blank is an assistant professor of finance at Mississippi State University with expertise related to how firms allocate capital, as well as the role of credit in mortgage lending. His colleague at Mississippi State, Tom Miller Jr., is a finance professor who has written a book on consumer lending, in addition to providing his expertise to policymakers.

Lenders stay in business when borrowers pay back loans.

Some borrowers consistently make prompt payments, while others are slow to repay, and still others default – meaning they do not pay back the money they borrowed. Lenders have a strong business incentive to separate loans that will be paid back from loans that might be paid back.

So how do lenders distinguish between good borrowers and risky ones? They rely on various proprietary credit scoring systems that use past borrower repayment history and other factors to predict the likelihood of future repayment. The three organizations that monitor credit scores in the U.S. are Transunion, Experian and Equifax.

Although 26 million of 258 million credit-eligible Americans lack a credit score, anyone who has ever opened a credit card or other credit account, like a loan, has one. Most people don’t have a credit score before turning 18, which is usually the age applicants can begin opening credit cards in their own name. However, some people still have no credit later in life if they don’t have any accounts for reporting agencies to assess.

Credit scores simply summarize how well individuals repay debt over time. Based on that repayment behavior, the credit scoring system assigns people a single number ranging from 300 to 850. A credit score ranging from 670 to 739 is generally considered to be good, a score in the range of 580 to 669 would be judged fair, and a score less than 579 is classified poor, or subprime.

The two most important factors in credit scores are how promptly past debts have been paid and the amount the individual owes on current debt. The score also takes into account the mix and length of credit, in addition to how new it is.

Credit scores can help lenders decide what interest rate to offer consumers. And they can affect banks’ decisions concerning access to mortgages, credit cards and auto loans.

Average credit scores in the United States have risen from 688 in 2005 to 716 as of August of 2021. They stayed steady at that level through 2022.

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