Finance Credit

How Credit Scores Are Calculated

Published at 01/24/2012 08:41:24

What a credit score is

With increased developments in technology, it’s now possible to apply for credit online and get approved instantly. Most people wonder how some people get an instant approval on their credit application while for others this means waiting for approvals that are sometimes unsuccessful. The answer to all this scenarios is credit score. This is simply a mathematical algorithm number that is generated from information about your credit which is then compared with similar data from other persons who uses the same credit facilities as you. A credit score gives a clear indication on how likely you are to pay your credits and other bills. If you are wondering how credit score is important, try applying for a credit and see the role that credit score plays in the whole process.

Important of credit score

Most people do not realize how credit score is vital in determining if they are to get that car mortgage they so badly need or not. Credit card companies will also use credit score to determine the amount of credit they can extend to you based on your ability to pay as revealed by the credit score. It is simply a measure on how risky it is to trust you with the credit. Banks will have to be convinced beyond reasonable doubts that loaning you money is not a bad investment decision for them. This is all possible through credit scoring

How a credit score is calculated

How credit score is calculated is rather interesting but most lenders will tend to make their methods as secret as possible. Although a range of formulas are applied, the basic principle is the same. Lenders determine the number of debts you have, their total amount and your repayment track record. How credit score is calculated is basically a determination of your past credit history. Most large creditors will tend to develop credit systems instead of credit scores but they all tally to one and the same thing. Other creditors and lenders will use more than one model while determining your credit worthiness. As of recent, consumers are able to purchase a few formulas of how credit scores are determined and know where they stand on their sown before approaching their lenders. Actually, when people say credit scores, they in short mean their FIC0 score or a score that uses a similar numbering system. This is the most popular score used by a number of lenders such as banks and credit card companies.

What’s the big deal with credit score?

Having understood how credit scores are calculated, so what’s next? No matter which credit scoring system or model the creditors use, it works in your favor to have a good credit score. This is the major determinant of whether you get a credit or not. It also signals which credit rate will be applied on the credit advanced to you. Thus, the better your score, the lower the interest rates on your credit. Most people are very much aware of how credit is affected by different credit scores as far as repayment of the debt is concerned.