« Credit Check | Main | Debt Free »
Credit Score
Most of us have heard of credit scores, but what do they mean? A credit score is a number that represents the statistical likelihood of an individual to repay or to be delinquent on a loan. This number is based on the individual’s past credit history, and it is what banks and creditors look at when deciding whether or not to extend an individual a line of credit.
In most cases, your credit score is your FICO number. FICO stands for Fair, Isaac and Company, and it is usually the standard model people use. But there are three other major credit bureaus that also have rankings. Equifax has its BEACON score. Experian has its Experian/Fair Isaac Risk Model, and TransUnion has its EMPIRICA score. Also, other organizations may use their own information along with one or more of these scoring models. For the rest of this article when we talk about credit score, we will be talking about the FICO credit score.
Most credit scores fall between 499 and 800. If a person has a number below 499, they have “bad” credit. Anyone with a number over 800 has exemplary credit. The majority of people fall between 600 and 800. Even if someone has a low credit score, it doesn’t mean that they won’t be extended any credit. A low credit score is not a death sentence. An individual with marvelous credit may still be turned down for loans from time to time. It may depend on the specifics.
Let’s pretend someone with a low credit score applies for a loan in order to buy a truck to use for work. The lenders would probably see this as a good deal. Even though the borrower has a poor credit score, his loan is of such a nature that the creditors would probably fork over the money as long as he proved that he was actually getting paid more because he bought the truck. One the other hand, let’s say that someone with a high credit score wants to take out a loan in order to bake the world’s largest cake. Many creditors would frown on this. It is a silly, wasteful thing to do. With a high enough credit score, however, some institutions would probably lend that person money to do this. Although, any rational lending institution would probably rather lend money for a work truck than a giant cake, no matter the credit score.
Even if someone has a low credit score, their score will change over time. Let’s say that the person who borrowed money for the truck used his vehicle to make thick wads of cash. Over the next couple of years, that person pays off all accrued debt, including the truck loan. The person’s credit score will dramatically improve. The trucker will probably be able to take out loans for a house or a newer, faster truck.
A credit score is an estimate lenders use in order to determine the risk when it comes to handing out loans. It is, however, not set in stone, and even a low credit score will not keep a person from getting a loan all the time.
Topics: Credit Repair |
