A credit score is a general average of a person's credit report into an easily understandable number. High credit scores are good and low credit scores indicate an absence of credit or bad credit. The most popular credit score is the FICO score, named after the company that creates it. In general, numbers above 750 are good and numbers that go below 450 are bad, but lenders make their own decisions based on the score itself. Credit bureaus protect the formulas used to create credit scores, but they serve several important functions in the business world.
Loan Approval
Most consumers are familiar with using their credit score to secure a loan, credit card or line of credit. Loans like mortgages have a complex application process and lenders examine all finances in depth. But they often begin with the credit score and base a large factor of their loan approval on it. Store lines of credit and credit cards put even more emphasis on the credit score when considering how much credit to offer. Often, these organizations will outright refuse credit to an individual who has a low credit score. Middle-range score may require a lengthy examination of credit before lenders agree to make loans.
Loan Rates
Once a lender agrees to provide a loan or credit card, the lender must decide what interest rate to offer. Along with loan fees, the interest rate charged on borrowed money helps the lender earn a profit. Rates also help lenders manage the risk of a loan default. A low credit score often leads to a higher interest rate for the borrower. If the borrower has a high credit score, the lender may lower the rate from the average to make the loan more attractive.
Insurance
Insurance companies rarely lend money, but they are often as interested in credit scores just as lenders are. The reasons for this vary. Insurance companies may look at credit scores when considering whether to grant a policy, since the score can help them guess how easily the policyholder will be able to pay premiums. The credit score will also inform the insurance company about the borrower's habits and borrowing risk, which can affect the risk of certain types of insurance as well, especially for companies.
Credit Reports
The credit score is only an approximation of credit. All borrowers should know that for large loans, lenders examine the credit report more than a credit score. The report lists specific credit accounts opened by the borrower going back several years. It tells about account payment history and, if closed, it tells how and by whom. This gives information with greater detail, and may show positive or negative aspects of credit that credit scores often leave out.
0 comments:
Post a Comment