What Are Credit Rating Scores?
A credit score is a measurement of an individual's ability to pay back a loan. These credit scores, compiled by credit reporting agencies, are drawn up using information related to the person's previous credit history, which is placed in a person's credit report. These scores are often used by lenders and other businesses to determine the terms under which it is willing to issue an individual a loan, such as the rate of interest he will be charged.
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Credit Scores
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Credit scores range from 0 to 850. The vast majority of individuals have scores above 500 and below 800. The higher a person's score, the better his creditworthiness. Generally, people who receive higher credit scores are offered more generous terms on loans by creditors because these people are considered to be at a lower risk of default. People with lower scores are charged more interest, because creditors think they're less likely to pay the loans back.
Credit Reports
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Credit scores are calculated using data found in a credit report. A credit report contains information about a person's past credit transactions. For example, if a person has taken out a home loan or a line of credit with a credit card company, then this information will be listed in the person's credit report. An individual's credit score will depend on many factors. 30 percent of the score depends on whether he has paid his loans back on time, 30 percent depends on the amount he currently owes and 15 percent depends on the length of his credit history.
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Credit Rating Agencies
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Credit reports are compiled by three credit reporting agencies, Equifax, Experian and TransUnion. These agencies are private companies that make money by selling information about a person's credit history to lenders and other people with a valid interest in knowing whether a person is creditworthy. Although these agencies are private, there are a number of federal laws regulating what information can be included in a person's credit report. In addition, agencies are legally required to make a person's credit score and report available to the person once a year for free.
Purpose
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Credit scores are primarily used by lenders to determine whether a person is likely to pay back a loan or not. However, credit scores may also be used by other parties to get a sense of a person's financial responsibility. For example, an employer may look at a person's credit score if he is interviewing for a job, or a landlord may look at a person's credit score to determine whether he will be a responsible tenant.
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