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What is a Credit Score?

Nov 10, 2007
Credit scores are used by lenders and creditors to determine whether or not to extend a loan to a consumer and at what terms. The score is a three digit number that is an indication of the consumer's likelihood to pay bills on time. The credit score is maintained and administered by the three credit bureaus,Equifax, Experian, and TransUnion. These bureaus use the information reported to them by creditors and lenders to calculate credit scores.

When a score is calculated, several key points are taken into consideration. The most influential factor to a credit score is the payment history, how bills have been paid in the past. Other factors that have an affect on a score are the amount of debt, length of credit history, recent credit applications, and types of credit. A low debt level, longer credit history, fewer loan applications, and a variety of different kinds of credit are positive factors that will increase a consumer's score.

Scores range between 300 and 850, with 850 being the highest credit score possible. Higher scores are considered favorable by creditors and lenders. A high score indicates that the consumer has demonstrated responsible credit behavior. They have paid bills on time, kept balances low, maintained credit for a longer period of time, and kept applications to a minimum.

A consumer with a high score will find it easier to be approved for new loans and applications. These consumers will also enjoy the benefits of lower interest rates and security deposits as well.

On the other end of the spectrum are those consumers with lower scores. A score can be decreased by negative actions such as late payments on credit cards and loans, maxing out credit cards, having a short credit history, and multiple credit applications. It is possible for a consumer with a lower score to obtain a loan, however, it usually comes at a higher cost. Lenders and creditors charge higher interest rates for consumers with a lower score. Some applicants might be denied for additional loans or credit cards because of the low score.

Note that a credit score is an indicator of past financial behavior. A low score does not mean that you cannot or will not pay your bills; likewise a higher credit score does not mean that you can or will pay your bills. The score is simply a number that indicates what you have done in the past regarding credit. Lenders can'tt simply take your word that you will pay a bill, so be sure to make positive financial decisions so your score will indicate your responsible financial habits.
About the Author
Peter Kenny is a writer for Finance 123. Please visit us at Consumer Debt Consolidation and Low APR Credit Cards
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