What is a credit score? Why is it important?

A credit score is a number based on your credit history that potential lenders use to assess whether or not to give you credit. The number can range from 300 to 900 (the higher the better) and is calculated based on a number of factors. It considers your payment history (including late payments, collections, bankruptcies, etc.), and your outstanding debt. The more credit you’ve racked up on your cards, the lower the score will be. The length of time you’ve had established credit is also evaluated since the more information a lender can assess, the better prediction he or she can make in lending credit. The types of credit you currently have are also assessed. This would include the number of loans you have and the types of accounts you hold. Lastly, a high number of inquiries on your report may lower your credit score since it reveals, in a way, how many times you’ve applied for credit.

The advantage of a credit score is that it makes the process of assessing creditworthiness quick, easy and objective. The number reveals to the lender immediately how much of a risk you are. Before applying for credit, it may be a good idea to find out your credit score by visiting websites that provide the service, or by requesting the information when you are applying for a loan.