What Is a Credit Score?


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Written by Josh McFadden | Last Updated December 4th, 2019
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If you are a professional athlete, a world-famous musician, movie star or author, or if you are a high-ranking executive of a multi-billion dollar corporation, paying for a new home, automobile or another large purchase probably isn't a concern.

For the rest of us who don't have tens of thousands, hundreds of thousands or millions of dollars lying around to buy whatever we want with cash, we rely on financing.

And even that is no guarantee we'll be in a position to acquire the item we desire.

Qualifying for the financing necessary to buy the home, car, boat or recreational vehicle of our dreams requires us to have a certain income and solid employment. And the third vital piece of the puzzle is one that often causes anxiety, or, depending on our situation, it might even cause us to squirm and sweat.

We're talking about the credit score.

This three-digit number is a key that can either unlock otherwise closed doors or one that will set off red flags and alarms.

Generally speaking, there are three different types of credit score models: FICO, VantageScore, and CE Score. FICO is probably the most common. It takes into account on-time payments, capacity used, the length of credit history, types of credit used, and past credit applications.

A credit score is a numeric measurement of a person's history with loans, credit cards, installment payments and other debt. A prospective lender will use the score-usually measured between 300 and 850-to determine if and to what extent you can qualify for a loan. If your score is high, you're likely to qualify for a bigger mortgage, more expensive car or higher credit limit. If your score in on the low end, you may not be able to finance the item you desire, and even if you are, your rate and terms will be stricter.

A person who has several forms of debt-multiple credit cards, second mortgages, several cars, installment loans, student loans, debt on furniture and appliances-will have a lower credit score than a person who has a few forms of debt. More damaging to one's credit would be late payments, defaults, bankruptcies or foreclosures.

On the other hand, if you have been consistently current with your payments and you installments are current, your score should be solid. Another important factor would be having low debt amount, meaning you haven't maxed out your credit cards.

However, having some debt is not bad. In fact, having a loan or two or a credit card is an important part of building up credit. These are ways of demonstrating to a lender that, yes, you have incurred some debt, but you showing a marked ability to pay it off. Young people often have lower credit scores because they simply haven't had opportunities to generate credit through the paying off of credit cards, auto loans or similar debt. This is why first-time car buyers or even first-time homebuyers often have the help of a co-signer.

People with low credit scores are often denied on loan applications, and they spend years trying to reconcile their issues. Conversely, those with higher scores enjoy a peace of mind knowing they are managing their debt and are responsibly paying off their obligations.


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