Credit Score and How It Works

Your credit score is like a financial report card. Find out why you passed or failed here.

What Is Credit and What Makes It Good or Bad?

Knowing what affects your credit and how it affects your credit will help you better understand it.

Your credit score is like your financial history report card. Lenders use your credit score and history to judge your reputation as a borrower and determine the risk you present to them.

Most traditional lenders will use your credit score and history to determine whether to approve your loan application or not and how much interest to charge.

Your credit score and history not only includes your borrowing history, which the lender will put under a microscope, but it also includes:

  • Loans you’ve had in the past seven to 10 years.
  • Amounts you’ve borrowed.
  • Payment history.
  • Bankruptcy, foreclosures or repossessions.
  • Credit inquiries.
  • Past addresses.
  • Former names.
  • Payment terms on all loans and credit cards.

Most lenders will use a computer program to go through your records to create a credit score. Though each company’s credit scoring model varies, generally speaking, a high score is anything above a 700. With a score this high, you have high chance of the lender approving you and offering strong rates.

Banks use software to handle this part of the process because manually going through every applicant’s credit report is time-consuming. These computer systems automatically look for patterns, red flags such as outstanding debts and characteristics to create their credit score. If your score doesn’t meet the minimum qualifications, you get an immediate rejection. If your score is up to snuff, you will move on to underwriting, which adds a human touch to the qualification process and can dig deeper into account specifics.

A lender will often request your credit report from at least one credit bureau, but they sometimes request all three bureaus’ reports. Federal law allows a person to view all three credit reports for free at least once a year, though there are websites now that give you unlimited free access to one or more of them.

A score of 750 to 850 is excellent. A 700 to 749 is considered good. A score of 650 to 699 is a fair rating. A score of 550-649 is poor, and anything below 550 is bad.

The Three Major Credit Reporting Agencies

These are like information warehouses, storing data from lenders you have previously worked with and other public records.

These agencies distribute your information to lenders when you apply for a loan.

The three credit reporting agencies are:

  • Experian
  • Equifax
  • TransUnion

Experian credit score range

The score range here is between 300 and 850. There is a PLUS score, but it’s meant only for consumers and falls on a scale of 330 to 830.

Equifax credit score range

This reporting agency’s score range is between 300 and 850.

TransUnion credit score range

Many financial institutions use this agency to manage customers’ existing accounts. It has a score range of 300 to 850

It is important for the ratings on these bureaus to be accurate to avoid getting rejections. You will also face difficult situations during job applications if there are errors.

Differences Between a Credit Report and a Credit Score

A credit report is a document that lays out your credit history over the past seven to 10 years. It displays your identity, employment history, any inquiries into your credit, payment history, repossessions, foreclosures and records of bankruptcy. It does not, however, show personal details such as your medical history, race, bank account or marital status. All three of the above credit reporting agencies offer credit reports, and each may vary slightly.

A credit score is a three-digit number that lenders use to determine your initial eligibility for a loan or credit card. After getting this score, some lenders may approve you on the spot, but most larger loans, like a mortgage or a car loan, may require further underwriting to determine eligibility.

What Situations Result in Good or Bad Credit Scores?

A good rating is mostly determined if you have made timely payments and have limited debt. A person with a bad rating often has many debts, past late payments and has borrowed more money than they can afford to pay back.

Importance of credit to consumers

There are various high-cost purchases that average earners couldn’t make without credit. If you needed to buy a house or car and have a favorable credit history, you may be able to get a loan for that purchase and spread out the payments over many years.

Buying expensive things in installments is not just a matter of personal fulfillment, but it actually results in better standards of living. An auto loan makes it possible for safer and more reliable means of transportation over long distances.

A mortgage enables a homeowner to manage their living environment and even build equity in their home if the home’s value appreciates in the coming years.

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