What is a Credit Score? – Meaning

What is a Credit Score?

What is a Credit Score? – Meaning:- What factors affect your credit score? How to calculate your Credit Score? A credit score is a tool used by lenders to decide, whether you qualify for a particular credit card or a loan or a mortgage service, etc.

Using the information on your credit report and any additional information you supplied as part of your application, lenders use a mathematical model to calculate a score that represents your credit history. This helps to indicate what kind of borrower you are, and how likely it is that you will manage your repayments.

The higher score, means lower risk?

Throughout your life, credit scores can play a key role in the financial products you take out. For example, when applying for a credit card or mortgage, it could be used to help determine whether your application is accepted and what interest rate you end up paying.

People with a higher score are often seen as lower risk, which means lenders are more likely to give them credit.

It’s worth remembering that every lender follows a different policy for credit scoring. So, if you don’t meet the criteria of one lender, you may still be able to get credit from someone else.

However, it’s important if you are refused credit to find out why you were turned down before making another application. You should also be aware that too many credit searches in a short time period may be viewed negatively by lenders.

What factors affect your credit score?

Your credit score is based on your credit report. Various different factors on your credit report can cause your credit score to change, including:

  • Information on your credit report such as how much of your available credit you’re using and your total debts
  • Your history of credit account payments
  • Credit searches (when a credit application is made)
  • Public records [electoral roll and county court judgments (CCJs)]

What is a Credit Score - 01

Simple steps to help manage your credit score

  • Review your credit report and score regularly to ensure the information is correct
  • Ensure you don’t miss any payments
  • Close any unused credit accounts, as having a large overall credit limit may be viewed negatively by lenders
  • Register on the electoral roll

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What to Do Before Applying for a Mortgage

Credit Score Meaning:-

While your credit reports are simply a track record of your payment history—no judgments—your credit score is more similar to a school GPA. It’s a cumulative number that measures your success relative to others, in this case grading you as a credit-worthy individual.

Lenders typically assign interest rates based on what bracket your score falls into. But credit scores aren’t just used by banks. Increasingly, insurance firms, landlords and even employers are using credit scores as a proxy for figuring out how responsible you are.

The most widely used score, from a company called FICO, ranges from 300 to 850. On the FICO scale, the higher the number, the better. In general, anything over 740 is considered excellent and will qualify you for the best rates: if your score is below 650, you’ll pay very high rates on loans and credit cards, if you qualify for them at all.

Even 20 or so points can make a big difference in what you’ll pay for credit. Someone with a score of 659 could get a 30-year mortgage at 5.3% at today’s rates; if his score was 680 he’d qualify for a loan at just 4.7%. That’s about $950 a year less in interest or about $28,000 over the life of the loan.

Your credit score is generated based on the information in your credit report. Fair Isaac, the makers of the FICO score, is tight-lipped about exactly how the scores are calculated. But they do give the weights of various criteria that they look at 35% payment history, 30% amount owed, 15% length of history, 10% new credit, 10% types of credit used.

Factors Determining your Credit Score

The most important factor in determining your score, payment history, is simply a record of whether you’ve paid your bills on time.

The second factor and more important one is the amount owed, is a little more complicated. It looks at how much you’re using of the total credit you have available – also known as your “utilization ratio.” Lenders believe that borrowers who are close to maxing out their credit are more likely to miss payments.

The third factor, length of history, is determined by the average age of your accounts, as well as how long it’s been since those accounts were used.

The two smallest factors are how often you’ve opened new accounts (opening a bunch at once will hurt your score), and whether you’ve got a mix of different types of credit (such as a mortgage, student loan and car loan). Lenders like to know that you can manage different kinds of accounts responsibly.

Conclusion:-

We hope after reading this above article you understand What is a Credit Score, it’s Meaning and also What factors affect your credit score? And How to calculate your Credit Score? This will help you determine and give an idea of whether you qualify for a particular credit card or a loan or a mortgage service that you are keenly seeking.

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