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Home: Credit Scores
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What is a credit score?
A credit score is a number that reflects your credit risk level. Typically, the higher the number on your credit score is an indicator that you are a lower credit risk. This number is generated through statistical models using elements from your personal credit report. Your credit score is not physically stored as part of your credit history on the credit file. Rather, it is typically generated at the time a lender requests your credit report, and is then included as part of the report. Your credit score is a fluid number and changes as the elements in your credit report change. For example, if you are late with a credit card payment or you apply for a new credit card, your credit score will fluctuate. |
It can be a little confusing and there are a number of different credit scores that are used in the financial service industry. Your score may be different from lender to lender (or from car loan to mortgage loan) depending on the type of credit scoring model that was usedby that institution.
Why are credit scores used?
Before credit scores existed, lenders had to actually physically look over each applicant's credit report to determine whether or not to grant credit to the applicant based on the perceived credit risk. A lender might then deny credit based on a subjective judgment - a consumer already held too much debt or had too many recent late payments on a credit card. Not only was this method time consuming, but human judgment was prone to mistakes and, as mentioned, quite a subjective process. Lenders used personal opinion to make a decision about an applicant that may have had little bearing on the applicant's ability to repay debt. Basically, if they didn't like you or looked at them the wrong way, you didn't get your credit. Credit scores help lenders assess risk more fairly because they are consistent and objective. Consumers also benefit from this method. No matter who you are as a person, your credit score only reflects your likelihood to repay debt responsibly, based on your past credit history and current credit status.
Who uses credit scores and how are they used?
Banks, credit card companies, auto dealers, retail stores, and most other lenders use scores to quickly summarize a consumer's credit history, saving the need to manually review an applicant's credit report and provide a better, faster risk decision. Although many additional factors are used in determining risk, such as an applicant's income vs. the size of the loan, a credit score is a leading indicator of one's basic creditworthiness.
What information impacts my credit score?
The information that impacts a credit score varies depending on the type of score being used. Generally, credit scores are affected by elements in your credit report, such as:
- Number and severity of late payments
- Type, number and age of accounts
- Total debt
- Recent inquiries
Credit bureau-based scores, like those generated by Experian, cannot use demographics prohibited under the Equal Credit Opportunity Act, such as race, color, religion, national origin, gender, age, marital status, receipt of public assistance or exercise of rights under Consumer Credit Protection Act. Scores used by individual lenders may use such elements as income, occupation, and type of residence in determining their own custom credit score.
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