The Importance of Credit Scores

Credit scores are a measure that lenders use to determine the risk associated with letting a person borrow money. How credit scores are derived and their actual or perceived worth in the market are issues of considerable debate. However, it’s hard to understate their importance in terms of obtaining critical and often scarce lending opportunities.

The credit score, often referred to as your FICO score, comes from a mathematical formula that’s derived from an array of variables. FICO stands for Fair Isaac Company, those responsible for establishing the formula. Some of the factors involved in determining a person’s credit score include duration of credit history, number of existing credit accounts, positive or negative standing of credit accounts, percentage of credit account limits currently used, and the number of inquiries made concerning the credit score.

Any one of the preceding variables, or a combination thereof can considerably impact your credit score. In general, a score of 720 or higher is considered A credit. This is a number that is often considered to be the minimum score that’s acceptable for loan approval. This has become the floor for credit scores as banks and other financial institutions recover from considerable losses resulting from defaulted loans. Scores are also graded, where A is excellent, B is good, and C and D are, well, not good.

What can you do if you want to improve your score? How can you determine what your score is prior to visiting your nearest bank for a loan? Try obtaining your free credit score from any number of credit reporting services. Almost all of them have websites, and many will offer one free credit report as a promotional tool. Also, if recently denied credit, you are entitled to obtain a free copy of your credit report from all three credit reporting agencies: Experian, Trans Union, and Equifax.

One thought on “The Importance of Credit Scores

Leave a Reply

Your email address will not be published. Required fields are marked *