Various institutions such as banks and car dealerships, request a credit score when you are applying for a loan or finance to buy a set of wheels. It is a numerical representation of how likely a person is to repay a debt. This score is a three-digit number that is based on creditworthiness and assigned to a person by an impartial rating agency. Someone with a higher credit score is seen as more likely to repay a loan on time and less of a risk to lenders when applying for a loan.
The two most popular credit scoring companies in the United States are the Fair Isaac Corp. (FICO) and VantageScore Solutions.
Different credit rating agencies place importance on various aspects of a person’s finances. Each of these scores could differ depending on the scoring company and the lender’s needs. Industry-specific credit scores could even be requested from credit rating agencies to assess lending risk for a specific industry. For example, car dealerships could require an automobile industry-specific score to determine the risk in approving an application for financing a car.
Fair Isaac Corp. developed the concept of the credit score with a view of offering financial institutions a way to assess the credit risk of their customers. The scoring takes into consideration various economic factors like an individual’s history of paying off debts, current outstandings, lines of credit opened and timely payment of interest. Based on all these parameters, you get a final 3-digit score.
This score ranges between 300 and 850 with higher scores indicating less credit risk. With over 50 credit score systems on offer and over seven decades of experience, FICO claims that 90% of leading lenders use their scoring system.
The three leading credit bureaus in America; Experian, Equifax, and TransUnion have formed a joint-venture to create VantageScore Solutions. Each of these rating institutions provides information with a varying weightage of importance to generate a VantageScore. These could include the length of credit history, and new credit availed, payment for loans and total debt load.
A person’s credit score could change every time a new line of credit is opened, or with every new mortgage. It could even rise if payments are made on time and the individual remains credit healthy. People with higher credit scores benefit from better interest rates offered by lenders and more extensive options for credit products.
