Credit scores are metrics which are used by lenders or other parties in conjunction with other factors to evaluate the risk which you would pose to them if they did business with you. They are most commonly used in the loan origination process but are used in the insurance industry as well. We will cover the basics in this article as relates to how credit scores are calculated as well as how they are used by lenders in determining whether or not you will qualify for a loan.
What factors go into a credit score?
Much of the mechanics behind how a credit score is calculated is proprietary and is not disclosed to the public, however some basic information is provided by the credit bureaus related to the scoring system. The main factors which determine a credit score, in order of importance, are payment history, credit utilization, length of credit history, number of credit inquiries, and credit mix. Payment history is related to the number of late payments and the total number of payments, and is intended to measure the timeliness of payments made in the future. Credit utilization is the amount of outstanding credit in relation to the total amount of credit available, and is intended to measure how responsibly available credit resources are managed. Length of credit history is related to the amount of time for which accounts have been in existence, and is intended to measure credit tenure. Number of credit inquiries is related to the amount of time which credit has been applied for, which is reflective of new credit accounts. Credit mix is related to the different types of accounts – mortgage, installment loans, student loans, and revolving lines – in the credit profile.