Learn the ins and outs of credit scores, including the factors that go into calculating them and how they are used by lenders to determine creditworthiness
A credit score is a numerical rating that represents an individual's creditworthiness. It is used by lenders and other financial institutions to determine the risk of lending money or extending credit to a borrower. The most commonly used credit score is the FICO score, which ranges from 300 to 850. A higher score indicates that the borrower is considered less risky and may be more likely to be approved for credit or loans.
Credit scores are calculated using information from an individual's credit report, which is a record of their credit history. The credit report includes information such as the types of credit accounts an individual has, the amount of outstanding debt they have, and their payment history.
Five main factors are used to calculate a credit score:
Payment history (35%): This factor considers whether the borrower has made payments on time. Late or missed payments can negatively impact a credit score.
Credit utilization (30%): This factor considers how much of an individual's available credit they are using. High credit utilization can indicate that an individual is relying too heavily on credit, which is seen as risky.
Length of credit history (15%): This factor considers how long an individual has been using credit. A longer credit history can indicate that an individual is experienced with credit and is less risky.
Types of credit (10%): This factor considers the variety of credit accounts an individual has. A mix of different types of credit, such as a mortgage, a car loan, and a credit card, can indicate that an individual is experienced with credit and is less risky.
Recent credit (10%): This factor considers recent credit-related activity, such as applying for new credit. Applying for too much credit in a short period of time can indicate that an individual is taking on too much debt and may be less able to repay it.
It is important to remember that credit scores are not the only factor that lenders consider when making a lending decision, and different lenders may use different methods to evaluate the creditworthiness of an individual. But overall, credit score is one of the most important and widely used metric for assessing the credit risk of a borrower
2023
