Credit scores: The higher, the better

The World Cup may be over, but it’s still important to know the score…your credit score, that is.

Ever wonder how a lender decides whether to grant you credit? For years, creditors have been using credit scoring systems to determine if you’d be a good risk for credit cards, auto loans, and mortgages. These days, other types of businesses — including auto and homeowners insurance companies and phone companies — are using credit scores to decide whether to issue you a policy or provide you with a service, and on what terms.

Some information about you and your credit experiences are collected from your credit report. That might include your bill-paying history, the number and type of accounts you have, whether you pay your bills by the date they’re due, collection actions, outstanding debt, and the age of your accounts. But scoring models also may be based on more than the information in your credit report. For example, when you apply for a mortgage loan, the system may consider the amount of your down payment, your total debt, and your income, among other factors.

Using a statistical program, creditors compare this information to the loan repayment history of people with similar profiles. For example, a credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. The total number of points — a credit score — helps predict how creditworthy you are: how likely it is that you will repay a loan and make the payments when they’re due. The higher your score, the more likely you are to get credit or insurance — or pay less for it.

To learn more, read How Credit Scores Affect the Price of Credit and Insurance.

 

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