What is a credit score rating? It is a predictive measurement of an individual borrower's credit stability. This number gives lending institutions a consistent and objective way to evaluate whether or not to extend credit.
The credit scoring system evaluates the patterns of hundreds of thousands of past credit reports to identify common variables, such as the probability of a person defaulting on a loan, or becoming over-extended.
By identifying consistent variables based on past credit history, the system can then predict future credit behavior.
Using a mathematical formula, your credit score takes into consideration your credit history, how you've paid your bills, how much open credit you have, as well as other factors that predict your credit worthiness. The formula then compares your information to the credit performance of other consumers with similar profiles to produce a three-digit number. Lenders use this three-digit number to determine whether or not to lend money, how much money to lend, and what interest rate will be charged.
Your credit score may be different from lender to lender, depending on the credit scoring system that was used. Credit scoring systems all look at the details in your credit report. However, the systems look at the information slightly differently depending on what the score is being measured for, and where the comparative information is coming from.
Below is a brief overview of the four main credit scoring systems.
Many major companies use credit scores in conjunction with other factors when making decisions about extending credit.
Now that you understand what a credit score rating is, we will discuss the different types of businesses that commonly use credit scores for decision-making.