Understand Credit Scores
 |
By: D.M.Giotikas
Generally speaking, credit is an exceptional tool. It gives us the ability to make large purchases that we otherwise couldn’t afford all at once. Of course, as any other tool, it comes with a price which is paid by us through annual fees and interest rates.
As you can understand (remember how you felt the last time you lent your neighbour 100$) the lenders (in our case, banks and credit card issuers) take a risk by lending us money and need to know if they will take their money back.
And since they lend money daily to thousands of unknown people, they need an objective and accurate tool to measure each borrower’s ability to repay his loan or card.
The lenders use two tools in order to identify the level of risk they may be taking if they lend to someone.
1. credit report -Contains a history of how you’ve paid your bills, how much open credit you have, and anything else about yor financial history that would affect your creditworthiness.
2. credit score- Is a three-digit number that is calculated based on your credit history. The system awards points based on data in the credit report, and the resulting score is compared to that of other consumers with similar profiles. Credit score is considered to be much quicker and objective compared to credit report and gives lenders a straight “approve/decline” answer for people who are applying for credit or loans. The score most commonly used by credit companies Is FICO score, although there are several other scoring methods. FICO stands for Fair Isaak and Combany. Fair Isaak is an independent company that introduced the scoring method and software and worked with each of the three major credit bureaus ( Experian, Equifax and TransUnion) in the early 80’s to come up with the scoring method.
The three national credit bureaus each have their own version of the FICO score with their own names, all based on the original Fair Isaak scoring method. TransUnion has the Empirica system, Equifax has the Beacon system, and Experian has the Experian/Fair Isaac system. Each produces equivalent numerical results for any given credit report.
Until 2001 only lenders and other businesses that used the score could access it, but now due to pressure from the U.S. Congress, industry, and consumer organizations it is also available to the consumers. You can get your credit score at many websites including TransUnion, Equifax, Experian and Fair Isaak’s websites or by asking your lender when you apply for credit.
About the Author:
D.M.Giotikas is the founder of Useful-Creditcards.com.
Online credit card resource dedicated to prospective cardholders with reviews, ratings, side by side comparisons and testimonials for trully informed decisions.
Find out now which credit cards you will most likely qualify for
(3 votes, average: 5 out of 5)
Loading ...