What is a credit score?

credit score

Credit score is a number that represents a consumer’s creditworthiness. It can range from 300 to 850. A borrower’s credit score is a measure of how attractive he or she is to potential lenders. Credit history is what determines a borrower’s credit score. This includes open accounts, debt levels, repayment history and other factors. To determine if an individual can repay loans on time, lenders use credit scores.

FICO (Fair Isaac Corporation) created the credit score model. It is widely used by financial institutions. There are many credit scoring systems, but the FICO score is the most widely used. You can improve your score by repaying loans on-time and keeping your debts low.

How credit scores work

Your credit score can have a significant impact on your financial life. Credit score plays an important role in the decision of a lender to lend you credit. For example, people with credit scores lower than 640 are considered subprime borrowers. In order to offset their higher risk, subprime mortgages are often charged interest at a higher rate than conventional mortgages. For borrowers with low credit scores, they may require a shorter repayment term and a cosigner.

A credit score of 700 and above is considered excellent. This may lead to a borrower being offered a lower interest rate. In turn, they will pay less interest over the loan’s life. Scores above 800 are considered exceptional. Although each creditor has its own credit score ranges, the average FICO score is used most often.

The amount of the initial deposit required to get a phone, cable or utility service, or rent an apartment, may depend on a person’s credit score. Lenders often review credit scores of borrowers when deciding whether to adjust an interest rate or credit limit on credit cards.

Credit Score Factors: How to Calculate Your Score

Three major credit reporting agencies are located in the United States: Equifax, Experian, and Transunion. They report, update and store credit history information. Although there may be some differences between the three credit bureaus’ information, the main factors that are used to calculate a credit score are the following:

  • History of payments
  • Total amount owed
  • Credit history length
  • Different types of credit
  • Credit new

Payment history is 35% of credit scores and it shows whether someone pays their bills on time. The total amount owed is 30%. It also takes into consideration the credit usage of a person. 15 percent of credit history is measured. Longer credit histories are considered more risky because there is more information to make payment decisions.

The type of credit used makes up 10% of a credit score. It shows whether a person has both installment credit (such as car loans or mortgages) and revolving credit (such as credit cards). It also accounts for 10%. This includes how many accounts a person has, the number of new accounts they have opened recently, credit inquiries and when the last account was opened.

The bottom line

Your credit score can make or break your life. A high credit score will help you get lower interest rates. This means you’ll pay less for any credit line you take out. It’s up you, the borrower to ensure that your credit score is strong, so you have more options to borrow when you need it. Learn more about credit scores at Once a Week Blog.

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