What is a credit score (or credit scoring)? In its most basic form, it is a system used by banks and other financial intermediaries to evaluate customer loan applications. It is based on automated systems that use statistical methods or models to assess credit risk, and the results are expressed in the form of synthetic judgments, numerical indicators, or scores associated with the person concerned. The goal is to provide a representation of how risky it would be to lend money to that person.
When the credit score is born
The credit score arises from the need to understand how risky it is to provide credit to a customer or not. In the early days of credit scoring, banks and other creditors used simple questionnaires to get an idea of how likely a person was to repay their debt.
Your credit score today
The modern credit score is the result of years of research and development into what makes repaying a loan likely. Banks and other lenders now use sophisticated computers that communicate with each other and deliver a score that comes very close to reality. This allows lenders to make quick and informed decisions about who to lend money to.
What’s in a Credit Score?
Your credit score is made up of five different factors
– Payment history (35%)
– Amounts due at the time of calculation (30%)
– Length of credit history (15%)
– New credit (10%)
– Types of credit used (10%)
Each of these factors is critical to giving a more accurate representation of how risky it would be to lend someone money.
For example, your payment history is the most important factor because it shows how likely you are to pay off your debt on time.
How to improve your credit score
There are several things you can do to improve your credit score, but the most important thing is to make sure you make all your payments on time. This includes credit card payments, mortgage payments, car loan payments, and any other types of debt you may have.
You can also improve your credit score by reducing your expenses. This means using credit cards, but not spending more than you can afford to pay each month.
Finally, make sure you have a diverse mix of credit products. This means having both installment loans and revolving loans, such as credit cards. This will show lenders that you can handle different types of debt and that you are not dependent on just one type of credit.
By following these simple tips, you can improve your credit score and make it easier to get the loans you need at the best possible rates.