Credit score is a numerical representation of an individual’s creditworthiness. It is a measure that lenders and financial institutions use to assess the risk of lending money to a particular borrower.
Credit scores typically derive from the information found in a person’s credit report. It includes credit history and various factors such as payment history, credit utilization, length of credit history, types of used credit, and new credit applications. These factors help evaluate how likely a borrower will repay their debts in a timely manner.
Fair Isaac Corporation (FICO) and VantageScore develop the most common credit scoring models. FICO scores range from 300 to 850. Higher scores in FICO indicate better creditworthiness. VantageScore uses a range of 300 to 850 as well, but they also provide additional categories (A, B, C, D, and F) for a more granular assessment.
Lenders use credit scores to determine whether to approve a loan application, the terms and conditions of the loan (including the interest rate), and the borrower’s credit limit. Individuals with higher credit scores are less risky borrowers and may get more favorable terms. Those with lower scores may face higher interest rates or even not get a credit.
Credit scores can fluctuate over time as credit behaviors change. Regular monitoring your credit report and practicing responsible credit habits can help improve your credit score over time. Responsible credit habits include making payments on time and keeping credit card balances low.
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