Understanding a Credit Score

You walk into an office of a leading lending organization armed with your certified employment salary particulars, excellent references and some bank statements, confident of coming back with your loan approved for your dream house. Instead, all they talk to you is about a credit score that you had never seen nor placed any importance on, even if you had heard it before. You go to another three places; but end up with the same result. You come home dejected thinking what a turnabout of events it was; but determined to get to the bottom of this silly credit score, whatever it may be!

Understanding A Credit Score

A credit score can be explained as a quantified numeric representation of your credit record; if you have had any credit transactions such as loans and credit cards obtained in the past. You cannot have any credit score if you have had no credit transactions before; and hence that too would be considered as a bad credit score. Credit scores are computed statistically from your credit records obtained from registered lenders by three credit bureaus, also called credit-reporting agencies, namely Experian, TransUnion and Equifax.

Lenders make use of the credit score not only to decide on granting a loan or not, but also as to determine the rate of interest and subject to what period of re-payment the loan may be given. A high credit score could earn you a lower rate of interest plus a longer period re-payment

However, if the credit score you are having is bad, then you are made to suffer both ways by imposing a higher rate of interest and giving a shorter period to pay off your debt. This is obviously to compensate the lenders for the higher risks the lending institution take in lending to borrowers with not so favorable credit scores.

Presently, a credit score serves many more purposes than being a mere indicator of creditworthiness of a prospective borrower. From the detailed information of facts and figures available in the credit record, one can elicit some valuable indications of the traits and character of its owner. For instance it will show whether a person is willing to face up to his responsibilities and make payments on due dates or would like to postpone payments and further roll on the credit.

Due to these advantages that a simple three digit credit score offers, it is not surprising that apart from financial and lending institutions, now many companies in diverse trades have started using credit scores in a big way for background checking and screening of their potential clients and employees.

The higher demand for credit scores of individuals emanating from many quarters has made some suppliers of credit scores to commercialize their issue. A fee of $ 12.95 is charged by Equifax for a cursory perusal of your FICO credit score via their website, while Experian too sells its own version of credit score for the same amount. However, TransUnion offer their own version of credit scores together with the credit report at a lesser fee of $ 9.00 each. .

Both Experian and TransUnion claim that their versions of credit scores too are compatible with the FICO scores. They can be purchased online or over the phone or you can get it mailed to you.

Every individual in the United States gets free credit reports from all three credit bureaus and therefore they see no reason why they should purchase them as well. In fact in some of the States, every prospective borrower is issued a credit report free of charge within thirty days if his loan application is refused by any lending institution in total or if he is granted a less favorable loan subject to added conditions and terms of payment on account of a bad credit score.

FICO, a creation of the Fair Isaac Corporation, is the model most widely used in the computation of a credit score. It has a range between 300 and 850 points and within this range, lenders of credit facilities including for mortgage loans confidently base their decisions on very far-reaching and important issues. These decisions center on aspects such as who are likely to falter in their repayments and are therefore unsuitable for lending and who are likely to honor their commitments and are good prospects for furthering their business and to whom they may lend at a lesser amount than requested, and with higher rates of interest; and any other additional conditions and terms of payment to be enforced.