You know a credit score is important when you apply for a loan or credit card – but do you know exactly what it is and how it can affect your chances in getting the financing you want?
Creditors use a credit scoring system to help determine whether to give you credit, and how much to charge you for it. Your credit information like your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt and the age of your accounts is collected from your credit application and your credit report.
Using a statistical formula, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor. A total number of points — a credit score — helps predict how creditworthy you are; that is, how likely it is that you will repay a loan and make the payments on time. Generally, consumers who are good credit risks have higher credit scores.
You can get your credit score from the three nationwide credit reporting companies — Equifax, Experian and TransUnion — but you’ll have to pay a fee for it. Many other companies also offer credit scores for sale alone or as part of a package of products. You are allowed to get one free credit report per year. Get it for free here: AnnualCreditReport.com.