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What is a credit score?
A
credit
score is a sum used by lenders as an indicator of how likely
you are to repay your loans. Your
credit
score is generated by a mathematical formula utilizing the
data from your TransUnion, Equifax or Experian credit reports. Lenders
have been using credit scores as part of the lending decision for
over than 20 years.
What factors influence my credit score?
Various factors determine your
credit
score, including the following:
- Payment History
- Outstanding debt
- Length of credit history
- Severity and frequency of derogatory credit information such
as bankruptcies, charge-offs, and collections
- The amount of credit used compared to the credit available
How does my credit score affect me?
Your
credit
score is an important indicator of your financial health.
Lenders use your credit score to determine:
- Whether or not you are a good candidate for a loan
- What type of interest rate you will pay
While your
credit
score is a key determinant of your creditworthiness, lenders
also examine the information on your
credit
report and your loan application. Regularly checking your
credit
report enables you to:
- Be informed of the most up-to-date information in your
credit
history.
- Correct any inaccuracies, to make sure that your credit data
is a true depiction of your
credit
record and increasing your chances of receiving credit
under the best possible terms
What is a "good" credit score?
There are several types of
credit
scores available. Typically, the higher the score, the better.
Each lender decides what credit score range it considers to be a good
credit risk or a poor credit risk. For this reason, the lender is
the best source to explain what your credit score means in relation
to the final credit decision. After all, they determine the criteria
used to extend credit. The credit score is only one component of information
evaluated by lenders.
What is credit scoring?
Credit scoring is a method used by lenders to help decide whether
or not you are a good candidate for a loan.
Lenders employ a credit scoring system to determine your credit
score:
- Compares information in your
credit
report to the performance of consumers who have similar
credit characteristics
- Examines many credit characteristics including your payment
history, the number and kind of accounts you have, the number
and frequency of late payments, and any collections or bankruptcies
Generally speaking, positive credit characteristics make your score
higher and help you to qualify for better loans. Negative characteristics
make your score lower and may interfere with your ability to qualify
for the best loan terms.
How is a credit scoring model developed?
A lender creates a credit scoring model by using several criteria:
- Selecting a large sampling of customers
- Analyzing the data in their
credit
reports to determine which factors relate to creditworthiness
- Assigning a degree of importance to each of the factors, based
on how accurate a predictor it is in determining who will repay
their loan on time
Get
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