Meaning of credit scores
- This topic has 1 reply, 2 voices, and was last updated 10 years, 5 months ago by
.
-
Posts
-
Can someone explain to me what the meaning of credit scores is? Thank you
It’s a grade for how you behave financially
It’s a grade for how you behave financially
Credit scores are best viewed as a grade for how you behave financially. If you are responsible with your money matters and are trustworthy, your grade (i.e. credit score) will be high and vice versa.
When lenders and creditors see that you have a high grade/score they know that you are likely to make your payments on time, and so they will be happy to lend you money and give you the best terms.
Over time, statistical data shows that credit scores are excellent predictors for the risk people pose to lenders. To be more specific, they are used to predict the likelihood of people making payments on time in the next two years.
There are three Consumer Reporting Agencies (Credit Bureaus) that collect consumer information and sell it to potential creditors. The 3 major credit bureaus are Equifax, Experian & TransUnion.
Credit scores are calculated from the information that is on your credit report using an algorithm. The most common algorithm is FICO, with almost 90% of financial institutions using it.
The basic principle of all credit scores is: credit history + current credit standing = good predictor of the future.
When you apply for credit, loan and various other services, the first thing a potential lender does is to pull your credit reports and scores from the credit bureau to asses your risk.
Because credit scores are such good predictors, they are uses to process applications for loans, mortgages, credit cards as well as insurance, cell phone contracts, apartment rentals and even job applications.
Because of this the federal government is regulating the consumer information business by means of legislation. The Fair and Accurate Credit Transactions Act (See FACT Act) that was put in place on 2003 entitles you to certain rights.
One such important right is that everyone is entitled to receive a free copy of their credit report from each of the 3 major credit bureaus every 12 months (See free-annual-credit-report.html for more information). You also have the right to receive your credit score upon request, but not for free.
For more information on the meaning of credit scores see what-do-credit-scores-mean.html.
Hope this helps.
- You must be logged in to reply to this topic.