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What Is A Credit Score?

A credit score is a numerical analysis that provides the creditworthiness of an individual and is used by lenders to ascertain the probability of the individual paying his or her debts. Organizations are generating a credit score for every individual who has a Social Security number by using the data from the person’s credit history in the past. Credit scores generally comprise of a three digit number starting from 300 to 850. A score of 850 is the best credit score and individual looking to borrow money can achieve. A person who has the highest score is considered trustworthy and will find it easier to avail credit whenever required.

A score of 850 is the best credit score and individual looking to borrow money can achieve. A person who has the highest score is considered trustworthy and will find it easier to avail credit whenever required.

“Your credit score affects the interest rates you’re offered on credit cards and loans, can be used to vet your job application, and in some states may influence your insurance premiums.”Suze Orman

Understanding the credit score

The Fair Isaac Corporation which is also known as Fico is the standard model for credit scores which is used by financial institutions and this is the score that is the most common among the credit scoring systems which are used as of 2016. Insurance companies and mortgage industries are also providers of credit scoring systems. Consumers have an opportunity to possess high scores by maintaining an extended history of paying their bills according to schedule and staying away from debt.

When lenders took to offer credit to an individual the credit score has a key role to play. For instance, a borrower with a low credit score which is below 600 will not be able to receive a prime mortgage and will receive a referral to a subprime lender where he or she may receive a subprime mortgage at a higher rate of interest. On the other hand, a borrower with a credit score of 700 and above is considered as creditworthy and will be eligible to receive a mortgage at a lower rate of interest. People with high credit scores and applying for mortgages will be paying lower rates of interest during the duration of the loan resulting in savings.

Factors determining credit score levels

Five factors are considered when information is updated on the credit report of a borrower. Changes to the borrower’s credit score are based on whether he or she makes a payment or does not make a payment. The factors that are evaluated when calculating a credit score are the following:

  • The total amount owed.
  • The length of credit history.
  • Types of credit.
  • Fresh credit.

The payment history of the individual accounts for 35% of the score and indicates whether the person meets his or her responsibilities according to schedule. The total amount owed accounts for 30% of the score and indicates the sum total of all accounts that the individual has ongoing and the money owed on every account. The length of credit history accounts for 15% of the school to indicate how long the individual has a credit history and dates back to the time when he or she opened their first bank account.

The types of credit account for 10% of the score to indicate whether the individual has a mix of installment credit including car loans, mortgages, revolving credit, credit cards, Etc. Fresh credit accounts for 10% of the school and indicates whether the person is opening multiple new accounts simultaneously.

In order to generate a credit score, the agency requires six months worth of on schedule payment history because it provides them enough data for the generation. The credit score of an individual will also help to determine whether a deposit is necessary along with the amount to obtain a cell phone, utilities, cable services, rent an apartment or any other financial services. Lenders are frequently reviewing the credit score of a borrower especially when they need to change the rate of interest charged the borrower on a credit limit or a credit card.

“If you decide you need a secured card, use it to charge small items every month, then pay the balance off in full. If your credit score improves, and the bank doesn’t offer to upgrade your card within 12 to 18 months, give them a call. If they refuse, try another lender.”Jean Chatzky

A credit score is a method of identifying whether an individual is creditworthy or not. It can and will determine whether the person is eligible to receive the credit of any type and most importantly the rate of interest he or she will be required to pay for the financial services received.

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