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Credit Scores: What are They for?

By Ruth Racey
Published: Tuesday, December 1st, 2009

Most Americans have heard the term “credit score” before. But surprisingly, not many know exactly what they are for. As a measurement tool, credit scores allow creditors and lenders to see at first glance whether an individual is worthy of receiving financial options.

Summing up a consumer’s credit worthiness into three digits may seem harsh for many consumers. With millions of individuals to track, however, the three credit bureaus tasked to keep credit records need an efficient way to provide immediate results for financial institutions. This is where credit scores come in.

Ranging from the lowest possible score of 350 to the maximum of 850, credit scores are derived using complex statistical formulas. Experts say that a score of below 700 merits special attention to avoid bad credit ratings. Instances of lower low scores can mean that an individual is not consistent in his or her credit history. That can indicate a higher risk for a creditor or lender.

So, just what do Experian, TransUnion, and Equifax collect from the different financial companies to put in credit reports? Well, reports contain a wide variety of information ranging from personal data to credit histories and purchases. The individual’s birthday, spouse’s name, and present and previous addresses are also included. Of course, detailed lists of past borrowings can also be found in the credit report. Lenders often provide the credit agencies with comprehensive reports about a consumer’s previous transactions with the companies as well as any outstanding balances.

Credit reports also include records of inquiries made by potential creditors or lenders into the records of a consumer. Banks and similar institutions often conduct background checks to see if applicants or potential clients are credit worthy. Having too many credit card firms or lending companies look into a credit report can spell trouble for an individual. Future dealings with other creditors can be tainted if the companies discover too many inquiries.

Data about legal proceedings or outcomes are also enumerated in credit reports. Any legal problems arising from failure to settle debt or balances can be detrimental to a consumer. These entries can drastically reduce the chances of a consumer getting loans or cards with good rates.

Credit scores are computed based on the different factors directly affecting a consumer’s credit viability. Scores define an individual’s ranking and preference as seen by creditors and lenders alike. Having knowledge of how these scores come to be will eventually help Americans regain control of their financial futures.

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