Credit Analysis: What is a Credit Score?

Credit Analysis is an important part of our process of learning which loans fit our appetite for risk as all loan listings on a peer to peer lending site are not created equal.

The first piece involved in credit analysis is the credit score. This is a single number score and the most common are FICO owned by Fair Isaac Corp and Beacon. The first number on the credit report is the FICO or Beacon score and on you are given a score range that looks like this: (this is directly from a Prosper loan listing)

Prosper rating:  A

Prosper Score (1-10):  9

Credit score:   760-779 (Mar-2013)

So when it says the score if 760-779, what does that mean? The credit scoring range is from 350-850 and many things affect the score. One of the most important things to realize is that the score changes on a monthly basis. Think of it this way, if your entire credit history is like a long epic movie, then the credit score is like one scene from it. It’s a single snapshot in time. Its sole purpose is to determine what kind of credit risk are you to lend money to right now. Today. Since it is a snapshot, it’s something that is constantly changing. The reality is that the constant change is really a monthly change as things like mortgage and credit card payments are reported monthly.  This score range in the example above though is an excellent credit score.

Fair Isaac does not reveal what is in their proprietary scoring method but there are some things we do know. For instance, if it’s a snapshot about how risky you are to lend to today, then it would make sense to think that recent pay history is more important than your pay history from 5 years ago, right? So if you have paid your mortgage and credit cards all on time for the last 90 days, then you probably have a pretty decent score, or at least much better than if you hadn’t.


Ranges of Credit Scores

Generally, credit score ranges look like this:

750-850 the best and outstanding credit

700-750 very very good credit, low risk to lend money to

660-700 good credit probably solid but not perfect pay history

620-660 credit has some challenges in it, worth investigating to find out what

Below 620 very poor credit


However, as you will soon see and learn (or at least I hope so), not every 670 credit score is the same.





About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

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