The risk-scoring process examines a consumer's credit report, assigns numerical values to specific pieces of information in the credit report, puts those values through a series of mathematical calculations and produces a single number called a risk score or credit score.
Essentially, a credit score is a statistical summary of the information described in words and figures in a credit report. The score predicts how likely consumers in a specific score range will repay their debts.
Credit reporting agencies are one source of credit scores. The main purpose of a credit score is to help lenders quickly and objectively decide whether to approve your credit application.
The Following Behaviors Are Likely to Improve Your Credit Score:
- consistently paying your bills on time
- keeping your overall debt at a reasonable level relative to your income
- actively and responsibly using several credit cards
The Following Behaviors Are Sure to Worsen Your Credit Score:
- consistently paying your bills late
- declaring bankruptcy
- owing a large amount of non-mortgage debt
- carrying a large number of credit cards
- applying for multiple credit cards or loans within a recent time period
FICO Scores range approximately from 350 to 875 points. The higher the number of points, the lower the risk of default. Statistics show the following:
- Below 600 are usually categorized as high risk
- Above 800 are usually categorized as low risk
In conclusion, understanding how credit scores are determined can help you when deciding to purchase or to refinance a home.
