Credit Score Ratings Explained - Glossary and Overview

Reader Question: Are credit scores and ratings the same thing? What is a FICO score? And what does it all mean to me, as a home buyer?

It's easy to get confused by all of the different terminology used to describe credit scores and ratings (along with different reports and scoring models). So let me start by explaining the difference between your credit rating and your credit score, and then we can discuss how it affects you as a home buyer.

While they are often used interchangeably, credit ratings and scores mean slightly different things:

• Let's start with the credit rating. This is an overall assessment of the creditworthiness of a person or business. It assesses the level of risk associated with that person or business, from the perspective of the lender or creditor. A credit rating is often expressed as a letter, such as A, A-, B, etc.
• Your credit score is similar to this, but it is expressed as a number. This is a more specific measurement of your creditworthiness. To determine this number, data from your credit reports is put through some kind of scoring model (FICO is the most commonly used). This produces a numerical grade referred to as your credit score.

So when you hear somebody refer to their credit score rating they are typically referring to the numerical assessment mentioned above. This brings up the second part of your question -- what is FICO? This acronym stands for Fair Isaac Corporation, which is the company that developed the scoring model used by most mortgage lenders. Bear in mind there are different models used to produce different credit scores. But the FICO model is the most popular, and it my view it is slowly but surely becoming the standard.

Why is this important to you, as a home buyer? Well, when you apply for a mortgage loan, the lender is going to review all aspects of your financial background. They will look at your income, your debt, your current assets, and yes ... your credit score and overall rating. They will use this information to determine the level of risk associated with giving you a loan.

If you have a high credit score / good credit rating, you'll have a better chance of qualifying for a loan. You will also get a better interest rate on the loan, and this means a smaller mortgage payment -- obviously a good thing. On the contrary, if your credit score rating is low, you'll have trouble getting approved for a mortgage loan. And if you do get approved, you'll end up paying more interest on top of the principal. This is why it's so important to maintain good credit when trying to buy a home. It opens up a lot more doors for you -- literally and figuratively.

Now when you hear somebody refer to their credit score rating you'll know exactly what they are talking about. Two different but closely related things.