A credit score, also known as a credit rating, is a mathematical expression calculated on the basis of a credit report, usually sourced from three credit-reporting agencies. The credit score expresses the probability that a borrower will repay his debts according to his promise. It is essentially a financial estimate based on borrowers’ past credit behavior, which fluctuates in response to economic factors. Credit scores are one of the most widely used and influential tools for financial institutions and lenders.
It can either be positive or negative. A credit score can range from zero to 6; the higher the number, the higher the risk of lending. Generally, consumers prefer a credit score that is between six and nine, indicating that they have been reliable in paying their debts in the past. People with high credit scores have better access to lines of credit. Credit utilization is a commonly used financial term to describe people’s total debt in relation to their credit limits; the lower the number, the more money a consumer can spend without incurring debt.
Lenders consider a borrower’s credit scores when determining if he will qualify for a loan or not. High credit scores are generally considered advantageous in terms of loan approval because lenders have the guarantee that the borrower will be able to pay off his loan in a timely manner. However, low credit scores mean that the consumer may have difficulty in obtaining even a standard loan or getting approval at all for a loan of high interest rate.
The major credit reporting companies (Equifax, Experian, and TransUnion) gather information on credit scores based on several different sources. These sources include individual reports from credit card companies, motor vehicle offices, employers, student loans, insurance companies, banks, and mortgage companies. The sources’ data are analyzed to give credit scores. However, separate reports from Experian and TransUnion are not included in the credit score calculation process.
Major credit bureau experian and transunion use different data sources to calculate individual credit scores. These data sources include Experian’s and Trans Union’s surveys of consumers about debt, auto loans, credit card balances, and various aspects of personal finance. Each month, Experian sends a survey to its members regarding various aspects of their credit scores. The results from these surveys are then used to calculate slightly different scores for each individual. In order to slightly different the result that will be published by the credit bureau, the companies rely on slightly varying criteria for assigning credit scores.
When applying for a new mortgage or a car loan, the prospective consumer is asked to provide information about their credit score. If the potential lender receives an unfavorable score from the credit report, they will not likely approve the application. There are a variety of reasons why a lender might reject an application. Sometimes, a lender may have information on their records that indicate that the potential borrower may not be able to repay the loan with a higher interest rate or with a shorter repayment period. In other cases, a lender may simply be unfamiliar with a certain applicant’s payment history, which could mean that the applicant will default on the loan.
If a lender rejects your loan application, it is the responsibility of the applicant to find out why the application was rejected. A prospective applicant should request copies of their credit reports from all three credit reporting agencies and should compare the results with their own records to determine whether they need to work to adjust their scores. By consulting with their own records, applicants can decide whether they need to adjust their scores to get a better interest rate or to increase the amount of time to repay their loan. If the interest rate or the amount of time to repay the loan is too high, a borrower may be able to negotiate for a lower interest rate or additional points to be deducted from their credit score.
Applying for a mortgage is confusing, so it pays to make sure you know what type of information you need in order to apply. In addition to filling out an application, applicants must also read through their credit reports, meet with their lenders, and write a hardship letter explaining their income and debt history. While the interest rate you qualify will depend on your credit score, your financial information will determine the interest rate your lender will offer. So make sure to compare your credit score with your local or online mortgage rates before you apply.