If you have ever tried applying for a loan or a mortgage at a bank or a credit union, you are familiar with the term – creditscore. This is essentially a number that is generated by a computer after making calculations based on your credit history to determine whether you are eligible for a loan. This number is what a lender will use to decide whether or not to approve your loan application or what type of loan to give you.
Here are a few things you should be aware of about your credit scores.
The basics of credit scores
Basically credit scores are primarily meant to make decision making about lending easier for finance institutions. At the end of the day, a bank or a credit union needs an assurance that you will not default on the loan they intend to extend to you, so it makes sense for them to check your borrowing history to get an idea. Your credit score will paint a picture in terms of how much money you have borrower in the past and successfully repaid or defaulted on repaying.
The types of credit scores
There are many credit scores currently in use each depended on the scoring model that is in use. The most common used score is FICO which is the preferred score for home and auto loans. This score looks at your debt amount Vis a Vis your past repayments. It is however worth noting that at the end of the day all these scores make the same calculations i.e. they try to predict whether or not you will repay the loan.
The scores basically summarize the following:
- Payment history
- Amounts owed
- The length of credit
- New credit
- The type of credit
Since some people may not have a credit history, there are alternative credit scores that seek to find other insight on you such as your payment habits when it comes to your bills such as utilities and rent.
How can you find out what your credit score is?
All US consumers are entitled to free credit under federal law therefore you can get your report from Experian, TransUnion and Equifax, which are credit reporting agencies. You could also ask for your score from your lender during the time you are making an application for a loan. Always be careful especially with regards to websites offering free scores because a good number of them may be scams or may offer you inaccurate information.
All in all, the best way to maintain a good credit score is to avoid debt.
We trust this was helpful information.