Loan

What is Credit Score?

People with credit score less than 640 are considered as subprime borrowers.

Define Credit Score –

Credit score is basically from number from 300 to 850 which denotes the borrower’s credit worthiness. Lenders tend to give preference to those borrowers who have higher credit score. Credit score is calculated based on the number of factors. Some of the factors are credit history, levels of debt, repayment history, number of open accounts etc. Lenders uses this score to basically evaluate if the borrower can repay the loan in a timely manner.

There are multiple credit bureaus in the United States but Equifax, Experian and TransUnion are the three bureaus who dominate this sector and hold major national significance. They dominate the market for analyzing, collecting and disbursing information about the consumers in the credit markets.

How does Credit Score calculated?

These agencies mainly look at five major factors while determining the credit score of the individual. These are payment history, length of credit history, new credit, types of credit and the total amount owed.

Payment history is the major factor and occupies 35% of the credit score. It basically shows if the individual is paying their dues on time. Total amount owed is the second major factor and occupies 30% of the credit score. It is basically the percentage of credit available of the individual which is being used. Length of credit history occupies 15%. Long credit histories are considered less risky. Type of credit occupies 10%. It shows if the individual has any mix of installment credit such as car loans or mortgage loans. New credit occupies balance 10%. It shows how many new account has the individual opened.

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Credit score significantly affect the financial life of the consumers. It plays a major role in the lender’s decision to offer you loan or not. People with credit score less than 640 are considered as subprime borrowers. Mostly lending institutions charge higher interest on subprime mortgages than conventional mortgages to compensate themselves for taking more risk. They would also give shorter repayment term and would mostly ask for co-singer for borrowers with a lower credit score.

Credit score of 700 or above is considered good. Lenders tend to give loans to borrower with credit score of 700 or above at a lower interest rate which result in paying less money in interest over the tenure of the loan. Credit score over 800 are considered excellent.

Harish Yadav

Harish Yadav is the regular reader of different newspapers and articles and writes about Financing and Investments. He also often writes for breaking news.

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