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What Is A Credit Score?
A credit score, sometimes called a credit rating, is a
quantifiable number system used to calculate whether a
borrower can successfully pay off their accrued and any
future debts.
The credit score is calculated using
information from the consumer's credit report, such as
repayment history and documentation of outstanding debts.
Lenders use credit scores in order to make key decisions on
what credit limits and interest rates to offer prospective
borrowers.
There are various systems used throughout the world of
finance to measure a consumer's reliability to successfully
pay off debt. Many lenders turn to the oft-named and best
known scoring system, the FICO, or Fair Isaac Corporation.
The FICO employs strategic, mathematical formulas in order
to predict the possible outcomes in a lender-borrower
relationship.
Lenders use systems such as FICO and other reliable credit
scoring systems to determine whether or not extending credit
to a consumer is a good business risk. A credit score ranks
consumers in similar groupings. For example, a lender may
compare a small business owner seeking a loan to other small
business owners' credit scores, and from this pool of like
variables, make an appraisal on the risk of default.
Credit score systems, such as FICO, are made up of key
components that create a financial checklist. Each item on
this list is ranked by percentages, and the credit score is
tallied by adding the percentages together. The information
may include a consumer's past record of successful, on-time
balance payments, span of credit history and forms of credit
used. Credit scores rate risk by taking into account what
percentage of those limits were used by the consumer, as
well as a number of other factors. For a higher credit
score, experts normally recommend not using the maximum
amount on any single line of credit.
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