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How do credit scores work?

By Ruth Racey
Published: Thursday, May 6th, 2010

Many of us rely on credit to lead our lives. We buy most things on credit and our shopping depends on credit cards and loans. Our buying power and the amount of credit we get depends on a three digit number known as credit scores. This article will help you understand how these scores work and why are these scores so important.

How are these 3 Digit Numbers Calculated?

Credit scores depend primarily on your financial history that is shown in credit reports. The credit report is a list of your financial accounts and payment history. The credit score is a digital summary of your payment history and these three numbers allow lenders to understand if you have paid your bills, how many loans you have taken, if you are a defaulter and other important information. The process of calculating these scores is complicated but there are many videos and guides on the internet that explain the process in a simplified manner.

What is the Importance of Good Credit Scores?

A good score increases your credit capacity and buying power. If you have a good credit score then most lenders will be ready to give you credit but if your credit score is bad then you may have to pay a higher interest rate or you may be denied by lending companies. Credit cards, loans and many other financial services check scores while approving or declining credit.

Can I get authorized access to my Credit Score?

Up to the year 2001 it was not possible for consumers to know their scores but due to the efforts of Congress, consumers are now allowed to know their credit scores. Consumers can apply to get the results of their credit scores from credit reporting agencies or credit monitoring services. Consumers are charged a nominal fee for this service and the score is given to consumers in a few working days. The time taken to get the score depends on the credit company you are choosing.

While getting your score it is important to understand that these ratings cannot be improved unless you clear your bills. While many companies claim to improve your score for you in a few days, it is nearly impossible to change scores legally. If you are interested in improving your score then you should apply for a credit report and understand your payment history. You should then work out a payment plan to pay your dues so that your score is improved.

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