Understanding Your Credit Score

Almost everyone is familiar with credit reports and what they mean. 

Some even have an idea of what a credit score is, but that little number can determine a lot and it is important for every consumer out there to know what a credit score is and how it works.

Lenders and creditors rely heavily on this number to determine an individual’s interest rates, loan approval, and many other financial issues.

The first thing to do is understand what a credit score is. A credit score is a number calculated from various parts of a consumer’s credit history. For financial institutions this number can be a quick reference point for how creditworthy an individual is.

They want to avoid people who are deemed to be high risk.

How the credit scoring system works.

The credit score system works by allotting points in direct relation to the information on the credit report and comparing the results to other consumers with a similar credit background.  The idea behind the credit score for lenders is to decide how probable it is for the person in question to make timely payments and succeed in completely paying the loan back.

This is the reason some retail stores will provide instant credit to certain clients. Their credit score indicates to the store that this is someone they want to do business with.

The scoring system awards credit scores between 300 and 900. To reach an individual’s number several different aspects of financial information are questioned and a certain percentage of the total score is directly correlated to each aspect. Ten percent of the credit score is related to the kinds of credit the consumer already has.

It takes into account credit card limits and available credit as well as how many loans there are currently.

Another ten percent of the credit score comes from the number of inquiries on the credit report. If a consumer has applied for many credit cards or loans recently, it will show up. A lot inquiries reflects badly on the total credit score.

The amount of time the consumer has had credit at all plays a part in the process as well. Fifteen percent is allotted to this factor. Obviously the longer period of time the consumer has been active the better for their credit score.

From here on out, the different aspects of the consumer’s credit history plays a larger role. Thirty percent of the score is based on any outstanding debt. Items like cars and house would be considered outstanding debt.  The numbers of credit cards a consumer has that are at their limit are also part of that thirty percent.

But the single biggest factor taken into consideration when determining a credit score is the client’s payment history.

This area takes up thirty five percent of the total score. The purpose in payment history playing such a large role in the system is that is the most important factor lenders want to look at.

The lenders want to be assured that the applicant is capable of paying back the loan and have done so in the past.

When the credit score is thought of in its simplest terms, it is merely a number representing the consumer’s credit report. It is used for lenders and consumers alike to quickly and effectively see where a person stands in the credit world.