Credit Scores Explained – Know Your Rating

We often hear the term credit score or credit rating and it has always made us wonder what it actually meant for us. It seems like financial institutions can’t get enough of credit scores and almost all transactions that we make require some sort of report from a credit company. Let us have a more thorough analysis on what credit scores are and what they mean to us as regular citizens. As much as we would like to make the best of it, lack of understanding regarding your score could be deleterious to your future financial transactions especially with banks and other financial institutions.

Credit scores explained in terms of meaning and function

Also known as the FICO scores, credit scores are simply the summary scores of a person’s credit worthiness. FICO or Fair Isaac Corp is the company that established this scoring tool to easily determine such credit worthiness. That means, the information included in the report is basically distilled from all financial data of the person, calculated and tabulated to reach to a particular amount or equivalent.

Credit scores explained based on utility

What the FICO score for lenders and banks is an easy, convenient, accurate and reliable prediction of a person in terms of financial condition in which the lender will decide against the credit score to determine if you qualify for a loan or not. With the use of this system, lenders are able to streamline and make it easier to process loan requests and applications and determine the rates of the loan, and if the person is actually worthy for lenders to take risks. The scores range from 300 to 900, with the latter being the highest possible range and is considered a good rating.

Credit scores explained in terms of variables

before the credit scores are presented into a report, several details and information have to be accessed by the company that handles the credit report the scores will be based on 5 important factors in which deductions and additions will be made to determine the overall score of the person.

  • Credit scores based on delinquencies – if you failed to make the necessary payments for bills in the past; it is possible that the same thing could happen in the future.
  • Credit scores based on credit usage – if you have maxed out your credit card, you are considered to be of greater risk compared to those who do not use the credit card as a license in order to generate money that does not really exist. Any amount that you charge in the card is a loan and bigger loans mean bigger responsibilities.
  • Credit scores based on credit line age – According to the model presented by FICO; people with more established, credit lines tend to be less risky compared to newer credit lines so you have to develop your scores from scratch.
  • Credit scores based on the frequency of credit use – it is ideal that the person uses the credit in well paced periods of time compared to those who initiates several requests at a very short period of time. The way you use your card shows what kind of consumer you might be.
  • Credit scores based on credit mix – a person with only a secured credit card is considered as riskier compared to those with a combination of revolving and installment loans.

Credit scores explained with a focus on credit worthiness

The credit worthiness of a person varies depending on the kind of loan that he wants to acquire. For example, if you are asking for a mortgage loan, instead on focusing on the issuer, the broker might focus on the credit factors. Sign up now and receive your credit scores from all 3 credit bureaus.