Figuring out what these numbers mean can be difficult. What’s even more challenging is knowing how credit bureaus base their decisions on these scores whenever you need a loan. While most people are aware that their credit histories are recorded, some don’t even realize that they have a credit score. What makes these digits important is they can determine the fate of your car loan application or home mortgage.
Lenders use credit scores as the basis of whether or not you’re capable of paying a loan or credit card debts. They imply how good you are at managing credits. Banks and credit card companies do the evaluation of the potential risks. A decent credit score is essential for your financial health because the higher it is, the less of a credit risk you become. The widespread use of these scores has made credit more available and less costly.
Here are the two primary types of credit scores:
Generic credit scores
Many types of lenders and businesses use these to determine general credit risk. The credit-scoring model uses the same formula across all three credit-reporting agencies. The most widely used model is the FICO score calculation. FICO stands for Fair Isaac and Company. Also, lending agents use these scores to do the majority lending.
Custom credit scores
Compared to the first type, this can be a bit more complex. Individual lenders use them, and they rely on credit reports and account history from the creditors’ own portfolio. These can apply to specific types of loan, such as mortgage lending or bad credit auto lending. Your auto loan credit score falls in this category. This type focuses more on repayment probability to determine approval.
Boosting your credit score is not an overnight process. Still, there are steps you can take to make it quicker. The scoring formula gives more value on recent activities, so paying your bills on-time even in
a half-year period will have an impact.
Having a good credit score is important, but keep in mind that your age, assets, income or employment history have no role in determining your FICO scores. In addition, FICO scores look at all late payments in equal terms. Some specific creditors may place extra emphasis on assets, income, and employment history. Learn how to improve your credit scores so you can have a clean slate soon.