Understanding the Credit Scores
Different types of credit scores
Credit scores are numbers that lenders employ to determine the likelihood of repaying promptly if they grant an individual a loan or credit card.
The history of your credit determines your credit score. The FICO Score varies between 300 and 850. A good credit score is crucial to your financial security, as the higher one, the lower the credit risk you pose. There are two kinds of credit scores, general scores, and customized scores.
Various types of businesses and lenders can utilize generic credit scores to evaluate general credit risk. You can get your credit score in one score by using the same formula for the three agencies that report on credit.
The custom credit score was designed to be used by lenders who are individuals. They depend on credit reports and other data, like information about the history of accounts from the lender’s portfolio.
They are specific to the business in question or may be utilized by certain kinds of lenders, like credit unions. Custom credit scores may be applied to certain types of loans, like auto lending or mortgage lending.
Understanding the Credit Score Factors and improving your Credit Scores
The components of your credit report which shape your credit score are known as factors that affect your credit score. The factors that could impact credit scores are:
- Your total debt
- Account types
- The number of late payments
- Age of accounts
The factors indicate which aspects of your credit score most affected your credit rating at the moment of calculation. They also inform you of what you should take care of in your credit report to improve your creditworthiness as time passes.
Being sure to check your credit regularly will assist you in keeping a check on how these elements influence your score and what you might be in a position to make changes to boost your score.
Why do lenders make use of credit scores?
Before credit scores were established, lenders inspected the credit reports of each applicant to decide if they should give credit.
This was a lengthy process that resulted in errors or inaccurate results as lenders were able to make decisions that might not have been a significant factor in the ability of the applicant to repay the loan.
Nowadays, scores on credit can help lenders to assess risk more accurately.
- Credit scores are reliable and objective.
- They are a reflection of your potential to pay back debt in a responsible manner, dependent on your credit history as well as your current credit standing.