A credit score is an estimate of your creditworthiness as determined by a financial model, and is typically calculated based on the contents of your credit history, or report. There are many systems out there, but by far the most popular is the FICO score, utilized by all three major credit reporting bureaus. Lenders purchase this score, along with your credit report, and use it to determine the risk of you defaulting on your future loans.
Lenders are no longer looking to a credit score to help them gauge whether or not they should extend you credit, today, it is much more of a question of on what terms. Your credit score affects not only the yes or no decision on the loan or credit card, but also the interest rate and terms. The lower the score, the higher perceived risk, and the higher the interest rate.
History of Credit Reporting
Years ago, the local shopkeeper or small town banker's decision on whether to lend you credit was based on your reputation and the word around town. As the world has grown and financial institutions have evolved, more complex statistical rating systems have had to be developed. The finance world is dominated by large corporations, the owners of whom you will usually never come into contact with.
There are positives and negatives to this financial system evolution for the consumer. On the plus side, the market has become very efficient, i) forcing financial institutions to compete for your business and ii) granting you the power of choice. However, your entire credit history has been systematically reduced to a mathematical formula, the variables of which you have had no approval or input on. This is the key reason why it is crucial that the modern consumer be fully aware of the contents of his or her credit report, so that any misinformation can be refuted and repaired.
The Big Three
Credit bureaus, or credit reporting agencies, collect detailed personal financial information on individuals from lending institutions across the country. This massive amount of information, approximately two billion pieces of data per month, is then categorized and filtered through mathematical algorithms to determine individual credit scores. The resulting credit scores, along with all other data in the individual's credit history, are sold on an as-requested basis to financial institutions, employers, landlords and others for a fee. Many of these groups have such high volumes that each individual's credit report and score may cost only a few dollars.
Although more exist, the major three credit reporting agencies in the U.S. are Experian, based in Costa Mesa, CA; Equifax, based in Atlanta, GA; and TransUnion, based in Chicago, IL. These entities are all for-profit organizations and have no government affiliation. Generally speaking, these agencies do not share information with each other, so in reality, you have as many credit histories as there are reporting agencies.
Lenders are no longer looking to a credit score to help them gauge whether or not they should extend you credit, today, it is much more of a question of on what terms. Your credit score affects not only the yes or no decision on the loan or credit card, but also the interest rate and terms. The lower the score, the higher perceived risk, and the higher the interest rate.
History of Credit Reporting
Years ago, the local shopkeeper or small town banker's decision on whether to lend you credit was based on your reputation and the word around town. As the world has grown and financial institutions have evolved, more complex statistical rating systems have had to be developed. The finance world is dominated by large corporations, the owners of whom you will usually never come into contact with.
There are positives and negatives to this financial system evolution for the consumer. On the plus side, the market has become very efficient, i) forcing financial institutions to compete for your business and ii) granting you the power of choice. However, your entire credit history has been systematically reduced to a mathematical formula, the variables of which you have had no approval or input on. This is the key reason why it is crucial that the modern consumer be fully aware of the contents of his or her credit report, so that any misinformation can be refuted and repaired.
The Big Three
Credit bureaus, or credit reporting agencies, collect detailed personal financial information on individuals from lending institutions across the country. This massive amount of information, approximately two billion pieces of data per month, is then categorized and filtered through mathematical algorithms to determine individual credit scores. The resulting credit scores, along with all other data in the individual's credit history, are sold on an as-requested basis to financial institutions, employers, landlords and others for a fee. Many of these groups have such high volumes that each individual's credit report and score may cost only a few dollars.
Although more exist, the major three credit reporting agencies in the U.S. are Experian, based in Costa Mesa, CA; Equifax, based in Atlanta, GA; and TransUnion, based in Chicago, IL. These entities are all for-profit organizations and have no government affiliation. Generally speaking, these agencies do not share information with each other, so in reality, you have as many credit histories as there are reporting agencies.
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