Credit score

Debt Term

The term credit score refers generally to a number that some company has calculated that is supposed to indicate how “credit worthy” an individual or business is – that is, how much they can borrow, how likely is it that they will be late on some or all of the payments, and how likely it is they will default – not be able to (or choose not to) pay the balance of the debt.

The credit score is based on all of the information in the credit history of a person or business, plus a secret formula (a computer algorithm) that turns all of that information into a single number.

The reason why credit scores are popular with debt providers is that they lower the cost of evaluating whether or not an individual or business is a fit with their debt offerings. A single number calculated by a computer is cheaper than a staff person looking over the credit history of an unknown person or business. Also, a credit score does not contain all the private information of a full credit history so it can be obtained without permission of the business or individual.

Note that in many cases debt providers will look at the credit scores of both a business and the individual founder in evaluating credit worthiness. Sometimes equity investors will look at founders’ credit scores as part of due diligence.

See FICO Score and Business Credit Score for more details.

Don Gooding

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