How Lender's Evaluate Your
Credit
When lenders are
trying to decide whether or not
to give you a loan, one of the
many things they review is your
credit history. If you've
managed your debts responsibly
in the past, it shows that
you're likely to pay back what
you borrow — in other words,
you're a "good" credit risk.
Lenders often buy
both a credit report and a
credit score from the credit
reporting agencies: Equifax,
Experian, and TransUnion. Some
lenders create their own credit
scores.
Credit reports
Your credit report is a detailed
list of your credit history. It
consists of information provided
by lenders who have extended
credit to you. The lender
information may vary from one
credit reporting agency to
another, but includes the same
types of information — which
lenders have extended credit to
you, what types of credit you
have, your payment history with
lenders, and more.
Identifying
information such as your name,
date of birth, and employment
history is listed on your credit
report, but is not used to
determine your credit score.
Credit scores
In addition to the credit
report, lenders may also use a
credit score that is a numeric
value based on the information
contained in your credit report.
That score (usually between 300
and 850) is calculated by a
statistical mathematical formula
that evaluates various types of
credit report information.
The credit score
identifies to the lender the
level of future risk associated
with your credit history, as
compared to hundreds of
thousands of other credit
reports. The higher the score,
the lower the risk.
Credit bureau
scores are often called "FICO
scores" because many credit
bureau scores used in the U.S.
are produced from software
developed by Fair Isaac
Corporation (FICO).
While many
lenders use credit scores to
help them make their lending
decisions, each lender has its
own criteria, including the
level of risk it finds
acceptable for a given credit
product. There is no single
minimum credit "cutoff score"
used by all lenders, and there
are many additional factors that
lenders use to determine your
actual interest rates.
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