A credit score is a number that gives an indication of a person's capacity to meet financial obligations, especially loan repayment. It is usually used by lending institutions to estimate the credit risk of the borrower. The higher the score, the lower the risk for the lender.
A credit score consists of a three-digit number and an R-rating. The R-rating has a scale of 1 to 9 and is based on your past payment history. R1 is the best rating and it shows that you pay your bills on time while R9 is the worst. The three-digit number is an indication of your ability to pay back your debt.
Factors that can influence your score include:
Your Payment history: If you have a history of paying your bills on time, your credit score is likely to be high.
· Amount of credit owed: A high amount of debt reduces your score.
Types of credit established
Acquisition of new credit
What is my credit score and how is it calculated?
The methods used in calculating score are complex and vary from one credit bureau to the other. The most widely known system is the FICO scoring system, which ranges from 300 to 850. It is a risk-based system that estimates the possibility of a borrower defaulting on a loan from a lender. It is retrospective in nature, meaning that it reflects your past ability to pay your bills, which is usually but not always a true picture of your future ability to pay, based on your circumstances. Credit bureaus also have their own scoring systems, which are sometimes combined with the FICO system. Newer scoring systems based on a borrower's future ability to pay have also been developed.
The score range varies from one system to another. For instance, while the FICO score ranges from 300 to 850, the VantageScore score ranges from 501 to 900. This means that a person could have different scores at the same time, based on the system used.
How can I know my score?
You can request for your score for a fee from a credit bureau. There are some companies that provide free scores, but you would have to provide personal information, which could be dangerous if the "credit bureau" is not genuine.
What is my credit score used for?
Your credit score is used primarily to determine your ability to pay your bills, but credit scores are specifically being used for employment reasons nowadays.