Credit scores have become increasingly important, especially when it comes
to loans and mortgages. Credit histories and scores are used as indicators
to determine the reliability of consumers and the risk associated with
approving them for loans. It is important to understand the importance
of maintaining a healthy credit score and how lenders use them to determine
A credit history is a record of a borrower’s responsible repayment
of debts. Banks and other creditors look at a consumer’s credit
history to ensure the likelihood of repayment should the institution decide
to lend the consumer money. This information determines many aspects of
the lender’s decision including whether to issue a loan, how much
credit should be made available to the consumer, and what terms will apply
to the loan, including the interest rate.
A credit score is a number assigned to a person that indicates to lenders
an individual’s capacity to repay a loan. It is essentially a sum
of a consumer’s borrowing history and allows lenders to determine
how a consumer ranks as a borrower. Credit reports are the basis of lending
decisions and many aspects of a consumer’s life can be determined
by its health. They have an effect on a wide range of financial transactions
including credit card applications, car loans, personal loans, and mortgages.
The most widely used credit score iS Fair Isaac’s FICO score. A FICO
score is comprised of five components: (1) payment history; (2) credit
utilization; (3) length of credit history; (4) new credit; (5) credit
mix. According to FICO spokesman Craig Watts, “FICO scores give
the most attention to how you have paid back lenders in the past.”
It is important to check your credit score and credit report information
regularly. The Fair Credit Reporting Act provides that credit bureaus
must provide consumers with a free copy of their credit reports once every
12 months. Sometimes a credit report may contain incorrect information.
Should this occur, these errors can be fixed by contacting the creditor
that provided the incorrect information and the corresponding credit bureau
(Experian, Equifax, or TransUnion).