Credit Score Basics

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 financial eligibility

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).

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