What are credit scores? What does it mean? These are questions that many people in the United States are asking these days. Credit scores are used by companies and banks when they evaluate your credit worthiness. A good credit score can determine whether or not you qualify for a loan, the interest rate you pay and how much you are approved for.
A credit score, also called a FICO score, is a numerical representation of a person's credit scores, to reflect the creditworthiness of a person. A credit score is calculated using information usually sourced from three credit bureaus: TransUnion, Experian and Equifax. These three credit reporting agencies are required to provide financial information to the government and other organizations with a full disclosure of their credit scores. This information is then calculated using the appropriate formula to arrive at the credit score. You can click this link to know your credit score or check out this credit agency.
Why are credit scores important to potential lenders? One of the most common reasons is to help potential lenders to determine if you will make the proper payments when you take out a loan. For example, if you have a very high credit scoring model and are applying for a car loan, a lender might question your commitment to paying your monthly installments on time. If your credit scores are too low, it could mean that you have missed a lot of late payments in the past. This could lead to your application being denied.
How are credit scores calculated using the FICO format? The FICO credit scoring model is a highly specialized algorithm that is used to calculate credit scores. It is calculated utilizing detailed information about the person's credit reports from all three credit reporting agencies. This detailed information is obtained from the individual, through their request for financial information or from the government. It contains various pieces of information about each of the individual's credit history, which includes personal and credit accounts with creditors, number of credit accounts, length of time each account has been active, number of inquiry accounts, the number of credit card inquiries, any collection accounts, and the current balance of each account. Every piece of information that lenders receive from the credit reporting agencies is then separately calculated to come up with the final score.
There is also another additional process called the electronic credit report entry system or the ECR system that lenders can use to calculate their credit scores. According to the ECR system, it first goes over the basic data about the individual. Then it goes over the account information that was reported by the creditors on the individual's credit report. This process is known as the electronic entry system.
Why does a credit report include hard inquiries on my report? Credit reporting companies are required by law to disclose exactly what is being contained in the various pieces of information that they report to you. They are also required by law to inform you if the hard inquiries that they report against you are due to unfair trade practices or similar illegal activity. That is why credit scores sometimes include hard inquiries on your report.
How are credit scoring models determined? The way that credit scoring models are calculated is based on several different factors, including the age of the person requesting the loan, the amount of potential debt that the potential lenders will be interested in, and the level of consumer debt that you currently have. Another factor that may be used is the credit reporting agency that initially provided the information to the lenders.
Do you have to pay for your credit score? No. Although there are some potential lenders that do charge for the credit scores that they provide to potential borrowers, the majority of lenders do not have this specific requirement. If a lender does ask you for your credit score before approving a loan, they will most likely require you to pay an extra fee for this. You can read more on this here: https://www.huffpost.com/entry/build-credit-no-debt-boost-credit-score_l_5da4d41ae4b080c90e3d39a5.