How Credit Scores Works?

Just as a letter grade in school determined your academic fitness, so your credit score determines your financial fitness. Credit score is a numerical expression generated by a mathematical algorithm based on information in your credit report. The resulting figure is a highly accurate prediction of how likely you are eligible to pay your bills. Credit score which ranges from the lowest score of 340 to the highest at 850 determines the rate of interest and whether you can buy a house, car or computer or get a student loan. It also tells lenders how likely you are to default on a loan.

Credit scores are designed to know if you are creditworthy or not. Your credit score will be calculated on the basis of your credit report which contains a history of how you’ve paid your bills, how much open credit you have, and anything else that would affect your credit worthiness. In the process of credit reporting, the consumer agencies, banks and credit unions score individuals and determine their credit profile. They instead of manually reading through your credit report will just look at a number: your credit score. You are advised to know how credit reports works, before planning g for your financial future.

There are lots of credit score programs and models that generate your credit score. Different models can determine different scores. But the lenders use some scoring models more as compared to others. Among all, the most popular credit score is the FICO credit score, from Fair Issac Corporation. Its scale ranges from 300 to 850. There also exist other credit scores which might extend the FICO credit score, or they might be custom built for lender’s particular needs. In US TransUnion, Equifax, Experian and Innovis are the four primary agencies that maintain credit information.

Your credit scores do not determine the approval of your loan. They are simply numbers generated from your credit reports and from where your lenders sets standards on which credit scores are acceptable and makes the final decision. You must improve your credit score, to show that you are a seasoned, responsible borrower. Take a hard, objective look at your finances and make a plan to tackle your credit and set a date to reach the desired score, to enjoy a healthy credit file.