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Risk scores
Some lenders make hundreds — even thousands — of credit-granting decisions every day. To help them make those decisions faster, more accurately and more objectively, they utilize a decision-making tool called a credit score.
Essentially, a credit score is a statistical summary of the information in a credit report at the moment it is reviewed. A credit score often is calculated as a credit report is delivered electronically from the credit reporting company to your creditor. A credit score is not part of your credit history and does not appear on your personal credit report.
There are many sources of credit scores. Specialized divisions of some credit reporting companies develop credit scores, and other independent companies develop credit scores for credit grantors. Some credit grantors develop their own credit scoring systems.
Different scoring systems also may measure different types of risk, such as bankruptcy, profitability or collectability. In addition, there are scoring systems for different types of lenders or lending, such as auto loans, mortgages, banks and credit unions.
Even if there were only one type of credit score, however, not all credit grantors would use it in the same way. That’s because different credit grantors may view the same credit score differently. It all depends on their experiences with other consumers scoring in the same range, their marketing plans, their business niches and many other factors.
The automated process of using credit scores is very similar to reviewing credit applications manually. In both processes, specific information on the credit report is examined and rated by the lender. Credit scores are an advantage for consumers because they:
- Are objective and precise
- Eliminate individual biases from the credit-granting decision
- Result in faster, more accurate credit decisions
- Give more precise results, allowing more consumers to qualify for credit
- Reduce the cost of credit by enabling lenders to make the best, most efficient decisions
If your application is declined based on a credit score, don’t focus on the number, because the numbers vary depending on the scoring system used. Instead, concentrate on the factors from your credit report that most affected the score. You can improve your creditworthiness and credit scores for any lender by using those factors to change your credit use over time.
To better understand how lenders would view your risk level, you can purchase a credit score and report that provide not only your credit score, but also a thorough explanation on what in your credit history most affects your creditworthiness. Educational credit scores are available through many sources, including www.experian.com, www.nationalscoreindex.com, www.vantagescore.experian.com, and www.annualcreditreport.com.
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