What is Credit Score?
Explain Credit Score –
A credit score ranges from 300 to 850, which denotes the borrower’s creditworthiness. Lenders tend to give preference to those borrowers who have a higher credit score. A credit score is calculated based on several factors. Some factors are credit history, debt levels, repayment history, number of open accounts, etc. Lenders use this score to evaluate if the borrower can repay the loan in a timely manner. There are multiple credit bureaus in the United States, but Equifax, Experian, and TransUnion are the three bureaus that dominate this sector and hold major national significance. They dominate the market for analyzing, collecting, and disbursing information about the consumers in the credit markets.
These agencies mainly look at five major factors while determining the individual’s credit score. These are payment history, length of credit history, new credit, types of credit, and the total amount owed. Payment history is the major factor and occupies 35% of the credit score. It shows if the individual is paying their dues on time. The total amount owed is the second major factor and occupies 30% of the credit score.
It is the percentage of credit available to the individual which is being used. Length of credit history occupies 15%. Long credit histories are considered less risky. The type of credit occupies 10%. It shows if the individual has any mix of installment credit such as car loans or mortgage loans. New credit occupies a balance of 10%. It shows how many new accounts the individual has opened.
Credit scores significantly affect the financial lives of consumers. It plays a major role in the lender’s decision to offer you a loan. People with credit scores less than 640 are considered subprime borrowers. Most lending institutions charge higher interest on subprime mortgages than conventional mortgages to compensate for taking more risk. They would also give shorter repayment terms and mostly ask for co-signer for borrowers with a lower credit scores.
A credit score of 700 or above is considered good. Lenders tend to give loans to a borrower with a credit score of 700 or above at a lower interest rate which results in paying less money in interest over the tenure of the loan. Credit scores over 800 are considered excellent.