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How Credit Scores Work, What They're Intended To Measure And Why You Should Care.

Credit scores are used to assess the creditworthiness of a person, typically in the form of a numerical value which is assigned by a creditor. The three major credit bureaus—Equifax, Experian and TransUnion—use different models to calculate your credit score. There are also other credit scores in use by lenders such as VantageScore and FICO. Credit scores are often used like a grade, with high grades indicating a higher probability of repayment in the future. In this article, we'll look at what credit scores measure and why they're important for you to know about.

Credit scores are one of many factors that lenders use when deciding whether or not to make a loan.



An Overview of Credit Scores

Credit scores are numerical values assigned by a creditor to assess the creditworthiness of a person. The three major credit bureaus—Equifax, Experian and TransUnion—use different models to calculate your credit score. There are also other credit scores in use by lenders, such as VantageScore and FICO.

In this post, we'll look at what these scores measure and why they're important for you to know about.


What Makes Up a Credit Score?

Your credit score is determined by the information that creditors and other lenders have on you. This includes everything from your previous payment history to whether or not you're a smoker.

To calculate your credit score, a lender will take these factors and assign each of them a certain point value. These points are then totaled and used to create a grade for your creditworthiness.

The three major credit bureaus use different criteria and models to calculate your credit score, but the result is always a numerical value assigned by a creditor or lender. The numerical value is called your credit score. Credit scores range from 300-850, with higher scores indicating better grades. You can find out your FICO Score (a popular model) here: https://www.myfico.com/credit-scores/.


The Three Major Models For Calculating Credit Scores

Credit scores are one of many factors that lenders use when deciding whether or not to make a loan. There are three major models for calculating credit scores, namely the FICO score, VantageScore 3.0 and the TransUnion model.

The FICO score is a mathematical formula created by Fair Isaac Corporation and was originally designed as an individual credit score. The formula looks at your payment history, length of credit history, amounts owed on revolving accounts, types of credit in use and recent credit inquiries to calculate a numerical value which is then used to gauge your probability of repayment in the future.

VantageScore 3.0 is another type of mathematical formula designed specifically for calculating individual credit scores but it's produced by the company VantageScore Solutions LLC instead of FICO. This model also looks at your payment history and length of credit history (along with other factors) but instead uses a more complex algorithm than FICO's model to calculate your numerical value which varies from 300-850 based on certain variables like income level and employment status.

TransUnion's model looks only at how much debt you have relative to your total available income. It does not take into account any other aspects associated with your creditworthiness but instead just looks



When to Ignore Your Credit Score

It's important to have a credit score, but not every lender will use it as an evaluation tool.

If your credit score is low, you might be turned down for loans or other financial products. Low credit scores can also impact your ability to get insurance or gain employment.

Some lenders don't even report your credit score at all--they rely solely on information from other sources that measure the risk of lending to you. For example, your bank could evaluate whether you're likely to pay a bill in full and on time, or if you've had any recent changes to your income or employment status that might impact future loan repayments.


Should You Get A Second Opinion On Your Credit Score?

When you're applying for a loan, your credit score is one factor that lenders take into consideration.

Credit scores measure how likely you are to repay a loan. Lenders use credit scores to assess the risk of lending money to you. Some types of loans, like mortgages and auto loans, are easier to get than others. The difficulty in getting these loans can be measured by the relationship between your credit score and your income level.

In other words, if your credit score is lower than what lenders would like to see, it's likely that you won't be granted a loan for other types of loans. Your credit score impacts whether or not you'll be approved for a car loan, mortgage, or personal loan from a lender such as Wells Fargo or Chase Bank.


Conclusion

It seems like everyone these days is talking about your credit score. In fact, over 70% of consumers have a credit score, and nearly 45% of them are above 700.

It's no wonder that there's so much pressure to get your credit score up and working for you.

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