The credit score plays an important part in lending in the United States. The credit score is computed by Experian, Equifax, and TransUnion, the three major credit bureaus in US. The credit score predicts the exact amount of the risk of a particular borrower. This had eased the process of lending to aspiring consumers in US. When the credit score is good, banks and credit card organizations reduce the interest rates, initial payments, and other fees. If the borrower is a high risk candidate, then all these would be substantially higher to mitigate the losses that could arise from bad debt risk. This credit score system was first created in 1958 by FICO or Fair Isaac Corporation and it is followed in all lending processes nowadays effectively.
If you wish to understand credit score ranges and what they mean, then you should familiarize yourself with the computation process of the credit scores. About 35% is allotted to the previous payment history of the borrower. Prompt payment would raise your credit score, while late payments or defaults would drastically reduce the credit score. Another 30% is obtained from the actual credit utilization by the prospective borrower. The credit score could be improved by reducing the existing debt, which would lower the utilization ratio. Around 15% is allotted to the length of the borrower’s credit history over the past several years and the presence or absence of prompt payment. About 10% is about the type of credits used by the borrower. If the borrower had handled consumer finance, revolving credit, and installments properly, the credit score would be quite high. The final 10% is obtained from recent credit records or the recent searches for credit. If a borrower had searched or applied for many credits recently, this would result in the lowering of the credit score.
The FICO credit score ranges between 300 and 850, while the VantageScore ranges between 501 and 990. The median score is considered to be 723. However, majority of the financial institutions do not hesitate to lend if the credit score is between 650 and 799.
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