Original Post By Julia Kagan
What Is a Credit Score?
A credit score is a statistical number that evaluates a consumer’s creditworthiness and is based on credit history: number of open accounts, total levels of debt, and repayment history. Lenders use credit scores to evaluate the probability that an individual will repay loans in a timely manner. A person’s credit score can range from 300 to 850; the higher the score, the more financially trustworthy a person is considered to be.
The credit score model was created by the Fair Isaac Corporation, also known as FICO, and it is used by financial institutions. While other credit-scoring systems exist, the FICO score is by far the most commonly used. There are a number of ways to improve an individual’s score, including repaying loans on time and keeping debt low.
How Credit Scores Work
A credit score can significantly affect your financial life. It plays a key role in a lender’s decision to offer you credit. People with credit scores below 640, for example, are generally considered to be subprime borrowers. Lending institutions often charge interest on subprime mortgages at a rate higher than a conventional mortgage in order to compensate themselves for carrying more risk. They may also require a shorter repayment term or a co-signer for borrowers with a low credit score.