Have you ever wondered why you get an answer instantly after applying for credit online? The credit scoring system is behind the process and it's a special math formula that not only determines your credit worthiness, but compares your numbers to other individuals. The system helps lenders get an idea of how likely you'll be to repay your loan or making payments on your bills in general. The higher your credit score, the more likely you'll be approved. Yet, if your score is low, you could get approved and pay higher interest rates.There are different components in the credit scoring system that is used to create your unique score. Credit scores are divided into categories with each having a favorable percentage that reflects what you could pay in interest depending on what you apply for. The system uses scores between 300 and 850. The scoring system was developed by Fair Isaac Corp., also known as a FICO score.
The major credit bureaus including Transunion, Experian, and Equifax each have similar scoring systems but under different names. The scoring methods are under review and as time goes on they could change to help consumers and lenders understand financial numbers more efficiently. Actions you've completed in your past such as getting a credit card, getting utilities turned on and obtaining cell phone service are all connected to your credit score. If your payment history has been good, meaning you make payments on time, this may help improve your score overtime. Plus, such payment activity also influences credit increases on credit card accounts.
Many consumers may not realize this but at one point consumers were prohibited from learning their score from lenders. The process in analyzing a credit score was secret and considered too complicated for consumers to understand. This is partly why consumers have rights when it comes to learning and understanding their scores.
There are several factors that contribute to your score calculation. A certain percentage of your score is determined by how well you make your payments. Another percentage of your score is based on how much debt you have outstanding or credit you have available. Other aspects that share a percentage in your credit score determination include the length of your credit history, how often you apply for credit, and the diversity of your credit; what types of accounts you have established (revolving or installment credit).