A credit score is anumber lenders use to help them decide how likely it is that they will berepaid on time if they give a person a loan or a credit card. Your personalcredit score is built on your credit history. A decent credit score is essential for your financialwell-being because the higher it is, the less of a credit risk you are.

Types of Credit Scores

Thereare primarily two types of credit scores: generic scores and custom scores. Generic creditscores are used by many types of lenders and businesses to determinegeneral credit risk. You can access your generic score as one score using thesame formula across all three credit reporting agencies. Custom creditscores are developed for use by individual lenders. They rely on creditreports and other information, such as account history, from the lender’s own portfolio.They are unique to the specific business, or they may be used by specific typesof lenders, such as credit unions. Custom credit scores can apply to specifictypes of lending, such as mortgage lending or auto lending.

Understanding and Improving Your Credit Scores

The elements from your credit report that shape your credit scores are called credit score factors. Some factors that may affect credit scores are:

  • Your total debt
  • Types of accounts
  • Number of late payments
  • Age of accounts

Factors indicate what elements of your credit history most affected the credit score at the time it was calculated. They also tell you what you must address in your credit history to become more creditworthy over time.

Why Lenders Use Credit Scores

Before credit scores, lenders physically looked over each applicant’s credit report to determine whether to grant credit. This process was time-consuming, led to mistakes or biased results, and allowed lenders to make decisions that may have had little bearing on the applicant’s ability to repay debt.

Today, credit scores help lenders assess risk more fairly.

  • Credit scores are consistent and objective
  • They reflect only your likelihood to repay debt responsibly based on your past credit history and current credit status