Credit score

Credit score is a numerical expression based on a level analysis of a person's credit files, to represent the creditworthiness of an individual. A credit score is primarily based on a credit report information typically sourced from credit bureaus. Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Credit scores also determine who qualifies for a loan, at what interest rate, and what credit limits. There are many different credit scoring systems, but the most widely used in the United States are the FICO score and VantageScore.

Overview

Credit scores are designed to predict risk, specifically, the likelihood that a borrower will become seriously delinquent on credit obligations in the 24 months following scoring. Credit scores are used by lenders, including banks providing mortgage loans, credit card companies, and even car dealerships financing auto purchases, to make decisions about whether or not to offer your credit (such as a credit card or loan) and what the terms of the offer (such as the interest rate or down payment) will be.

Components of a Credit Score

The exact components of a credit score will vary depending on the scoring model being used, but they are generally based on the following factors:

• Payment History (Payment history): The record of your payments on all accounts, including whether you've paid on time.
• Credit Utilization: The amount of credit you are using compared to your available credit limit.
• Length of Credit History: How long you have had credit.
• Types of Credit in Use: The mix of accounts you have, such as revolving and installment.
• New Credit: Your pursuit of new credit, including credit inquiries and number of recently opened accounts.

Scoring Models

The most well-known credit scoring models are the FICO score, developed by Fair Isaac Corporation, and VantageScore, which was developed as a joint venture among the three major credit bureaus: Experian, TransUnion, and Equifax. While both models consider similar factors, the weighting of each factor can vary between models.

Impact of Credit Scores

A high credit score can make it easier to obtain a loan, rent an apartment, or lower your insurance rate. Conversely, a low credit score can make these transactions more difficult and expensive. Therefore, maintaining a good credit score is essential.

Improving Credit Scores

Improving a credit score involves several steps, including paying bills on time, reducing credit card balances, and limiting applications for new credit. It's also important to regularly check credit reports for errors and dispute any inaccuracies.

See Also

• Credit report
• Credit bureau
• Debt
• Loan