How Credit Scores Work
by: John Mussi
If you've ever wondered exactly how it your credit score is calculated or what effects your credit score can have, you're not alone. Though most people use their credit or make decisions that can cause changes to their credit score most every day, the majority of consumers tend to know little more about their credit score than the fact that it exists and that having a higher score is better than having a low one.
Below you'll find information on what your credit score really is, how it's calculated, and the effect that having a lower credit score can have on your life.
Defining the Credit Score
If you're not exactly sure what your credit score is then you might not be utilizing your credit opportunities to their maximum potential, or you may find yourself being denied new lines of credit without really knowing why.
Looking at your credit score from the most basic standpoint, your score is simply a numerical indication of how much of a credit risk you might be to potential lenders.
The higher the score is, the less risk of defaulting on the credit line there is associated with an individual… the lower the score, the more risk and the greater chance that they might default on the credit offered to them.
How Your Credit Score is Calculated
Since your credit score is a numerical value, there is obviously a method that is used to create this number. Whenever a copy of your credit report is requested, your credit score is generated by adding to the score for each positive record that appears on your report and subtracting from the score for each positive record. Though this may seem relatively straightforward, it can cause a bit of confusion at times… after all, records can stay on your credit report for up to seven years before they expire and are removed.
As an added complication, not all creditors report to credit bureaus consistently… and some only report to certain bureaus.
There are several different bureaus that compile credit reports for individuals, and potential creditors need only request a score form one of them; this can be a problem should a potential lender request a report from a bureau that your current creditors don't report to. Luckily, this doesn't happen too often.
The Effects of a Low Credit Score
Obviously, having a low credit score can hinder the lending or credit process if you're shopping for a new loan or credit card. There can be other effects generated by a low credit score that, while not common, can cause other problems with your way of life.
Some employers perform a credit check on their potential employees before making a job offer, especially in industries that deal with finance, banking, or sales.
Some private schools, institutions, and organizations may also require a credit screening before allowing new members to attend or join. Individuals who take advantage of some credit cards that are offered specifically for those with bad credit may be opening themselves up to a bit of additional hassle, as well… less reputable lenders sometimes sell contact information of their customers to telemarketers and junk e-mail senders.
This is why you should always do your research before deciding on any new service, so as to make sure to avoid unsavory businesspeople such as these.
Other problems may arise as well, though they tend to be less common than those listed here… and even these are not common occurrences.
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About The Author:
John Mussi is the founder of Direct Online Loans who help homeowners find the best available loans via the www.directonlineloans.co.uk website.
March 2006
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