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Credit
Scoring Made Simple
It's your right to know what your credit score says about you. Finding out this
information is doesn't cost a lot and takes only minutes to do - which may be
time very well spent.
So what is credit scoring?
Simply put, credit scoring is a method of assessing the credit risk of a loan
applicant. It uses mathematical models to evaluate a person's credit worthiness
based on their credit history and current credit accounts. The system was first
developed in the 1950s, but has come into widespread use in just the last
couple of decades.
In the early 1980s, the three major credit bureaus (Experian, Equifax and
TransUnion) each developed scoring models that allowed them to offer a score
based solely on the data of one individual. Creditors, especially those in the
home mortgage industry, frequently use these scores when deciding who gets a
loan and at what rate. However, it's worth remembering that creditors also
consider other information, such as your salary or employment history, when
making loan decisions.
What's in a score?
Credit scores are reported as a number, usually in the 330 to 830 range. The
higher the number, the better the score. Creditors see the number as an
indicator that an individual will repay a loan. Typically, scores are
determined by reviewing the following data:
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Your history of late payments
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Non-payments
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Current level of debt
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Types of credit accounts
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Length of credit history
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Number of credit inquiries
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History of applying for credit
Personal details such as race, gender and religion are definitely not
considered when determining your score. It's also worth noting that each major
credit bureau has its own method for calculating credit scores. However, the
scoring models have been fairly well standardized so that a "600" score at one
bureau is roughly the equivalent to the same score at another.
What's a good score?
Overall, a higher score indicates lower credit risk. People with high credit
scores, all things considered, have a good chance of obtaining quality loans at
the best interest rates.
Average scores indicate good credit, but also may point to potential trouble
areas that creditors will want to look at and review. A lender may require
additional documentation before a loan will be approved.
With lower credit scores, consumers may find that they can still obtain a loan.
However, the process will be lengthier and more involved, as creditors consider
scores below this threshold to be an indicator of greater credit risk. |
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