How Does a Credit Score Work?



Posted: Wednesday, April 12, 2006

by JP Burkhart
JP Burkhart

When you fill out an application for a mortgage, car loan or even a credit card, lenders will consult your credit score to determine whether you are an acceptable risk. While this may sound harsh and uncaring, the premise behind a credit score is to help place all borrowers on equal footing using a broad sampling to determine proper credit risk.

Determining Factors Credit scoring models use several methods of determining your ability to repay a loan. The first method is timely bill payment. If you are late or delinquent in bill paying it affects your credit score.

Companies extending credit will also look for those who have an established credit history. If you have little credit history to draw from there may also be a reduction in your credit score.

Having significant outstanding debt can have a negative effect on your credit score. If you have a credit card that is nearly maxed out, your credit score may be reduced.

Companies may look to see how long it has been since you last applied for new credit. If you routinely apply for credit it can also be factored into credit scores.

Multiple credit card accounts can also provide a negative impact on your credit score. Loans from a finance company may also be viewed negatively in conjunction with your credit score.

Other Factors to be Considered There are several additional variables that are considered in arriving at your individual credit score. These can include such things as length of employment, home ownership and type of job you currently have.

The higher your credit score the better chance you have of being granted credit that includes lower interest and better terms.

Should your credit score be border line, an application will generally be reviewed by a personal loan officer for final determination.

If Your Loan is Not Approved If you are denied because your credit score is too low, you have the right to ask specifically why the credit was not approved. Companies that specialize in loans are required by law to provide specific details regarding loan denial.

JP Burkhart recommends that you visit how does a credit score work for more information.

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Top-level comments on this article: (1 total)
» left by Anonymous 3 years 259 days ago.
Oh, and don't forget to mention that no matter how good you are about timely payments, being responsible and always paying your debt off, you will be disappointed! Credit scores are a very lousy way to judge a person. And you will always be judged by the bad and never that you have numerous perfect accounts! And it's probably not a good idea to even try or worry about it because (if you are an average person a.k.a middle class) it is impossible to be "perfect". What blows me away is that wealthy people have great scores (which make the majority of us look bad) because they have money to pay and buy and buy. Why do they even need credit? And low income people just get help from our taxes, so they don't even need to buy a house (they'll just live in sec. 8 homes). Heck, they don't even have to pay for food! And then there's the middle class, the people who work their tails off, give 1/2 of it to Uncle Sam, pay all their bills, cannot afford food and clothing and we're the ones who need credit because our only option is to pay it out!
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