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What Does Your Credit Score Mean?

By: Stephen Chua

Your credit score is a 3-digit number that let lenders know how much of credit risk you are. This number is between 300 and 850.

In general, the higher credit score, the better credit risk you make. This means you are likely to get approved for credit with a more favorable interest rate.

If your credit score is less than 620 or below, you will likely have difficulty getting credit or loan. On the other hand, if your credit score is above 720, you probably can get approved for credit very easily. However, different lenders looked at credit score in a different ways.

Some of them will use your credit score as the sole criteria for judging your credit worthiness. If you have low score, they will not want to work with you and reject your credit application right away.

Then there are other lenders who use credit score as one of the many factors to assess your credit worthiness. These lenders will also look at your credit history and identify any trends that may indicate that you are too risky for credit.

Lets look at the credit score a little closer. This 3-digit number is derived based on your credit report. This report contains a history of your past debt and repayment. The credit bureaus use the information in your credit reports as input for their own mathematical formula to arrive at the score.

Although each credit bureau calculates their score differently, their formula is based on the FICO model. FICO is the software developed by Fair Issac Corporation for calculating credit score. Many companies in the finance industry develop their own credit score model based on the FICO model. Thus sometimes the credit score is also called the FICO score.

Although no one know exactly how the credit score formula works except for those working with the credit score model, we can be sure that financial records such as late payment history, the amount of debt, type of credit and the length of credit are among the things that credit bureaus used to calculate your credit score.

The credit score system is developed more for the lenders than the average consumers. It is one of the methods that lenders used to assess your credit worthiness. It reflects how well you can manage your debt and bills rather than how well you can handle money. Thus to get a high credit score, you need to be a reliable borrowers, which means paying your bills online and keeping your debt-to-credit ratio low.

Article Source: http://www.bluearticles.com


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