What is a Credit Score?
For years, creditors have been using credit scores to determine if you’d be a good risk for credit cards and auto loans. More recently, credit scores have been used to help creditors evaluate your ability to repay home mortgage loans. Here’s how scoring works: Scoring is a system creditors use to help determine whether you will be able to pay your future bills on time. Information about you and your financial experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your application and your credit report. Using a statistical program, creditors compare this information to the past performance of consumers with similar profiles. A scoring system awards points for each factor that helps predict who is most likely to repay a debt.
Credit scores are numeric representations of your credit profile. The higher the score the better credit risk you are, from a lenders point of view. You can be denied a mortgage loan if your score is too low. These scores have been around for several years but started to be used in the mortgage lending business in 1995.
A credit score is a number that reflects credit risk level, typically with a higher number indicating lower risk. It is generated through statistical models using elements from a credit report; however, the score is not physically stored as part of the credit history on the credit file. Rather, it is typically generated at the time a lender requests a credit report, and is then included with the report viewed by the creditors. A credit score is a fluid number, and it changes as the elements in the credit report change. For example, payment updates or a new account could cause the score to fluctuate. There are many different credit scores used in the financial service industry. A score may be different from lender to lender (or from car loan to mortgage loan); depending on the type of credit scoring model that was used.
