What is a Credit Score?

This article is about the credit score system and why credit scores are important..

Credit Scores Outlined

Many Americans choose to apply for credit for a number of different reasons. Whether it is for buying a house, a car, or taking out a loan to purchase items that they may not have the money for right now, a credit score is reviewed each time credit is applied for in order to determine whether or not the applicant will be likely to pay back the loan. The credit score itself is actually a number based on past credit history, and can be affected by a number of different factors. Banks and credit unions will look at the credit score to determine how high a risk an individual is at paying a loan back, and they will usually decline applicants with low scores.

As mentioned above, a credit score can be affected by a number of different factors. Credit scores can be increased by paying bills on time each month, keeping the same bank accounts open for a long period of time and by avoiding any negative marks on your credit report such as loan defaults. A credit score can be decreased just as easily, by missing monthly payments and defaulting on loans, applying for credit and opening several new accounts, and by accumulating large amounts of debt through loans, credit cards and other forms of credit. Most banks and credit companies will report to credit agencies on a monthly basis, so keeping bills current and avoiding excessive debt is key when trying to increase your credit score.

Having a good credit score is important for many, since buying large items such as a home or a car usually require a loan. A good credit score will allow one to get lower interest rates, better loan programs, and the ability to choose from a number of different loan options. Those with low credit scores may have trouble finding banks who will offer them loans, and those who do will usually have extremely high interest rates that can end up costing a lot in the long run. Those with low credit scores will usually be declined by various credit companies, which can make it difficult for them to buy homes, cars or other items that usually require credit.

Credit Scoring Systems

A credit score is determined by past credit history, and both positive and negative factors are used to calculate it. The most common form of credit scoring is known as a FICO score, because of its origins at Fair Isaac and Company. Equifax, TransUnion, and Experian are the three national credit bureaus used in the United States, all of which use a credit scoring system based on the FICO.

A Credit score is typically determined by awarding points to positive marks on your credit report, and taking points away for any negative marks that may occur. There are slight differences between the three different credit bureaus, but all follow the basic guidelines set out by Fair Isaac and Company back in the 1980s. The typical range for a credit score is between 350 and 850, with 850 being a perfect score. A free credit report can be obtained by any bank or credit company that you use to apply for a loan, as well as at any of the three credit bureaus online.

Looking After Your Credit Score

It is important to review your credit report and note the positive and negative factors, in order to keep your score in a good range in order to benefit from having the choice of a variety of loan or credit programs and offers.

Site Links Related to Credit Scores

Equifax Credit Reports - TransUnion Credit Reports - Credit Bureau