Understanding Credit Scoring

You may have heard about FICO scores or your credit score, but what does it have to do with credit cards? It is very simple, when you apply for a credit card, bank account, personal loan, mortgage, or any other form of credit the lender is going to score the application. The lender is going to look at the credit score of the application and determine whether to accept the application. If the credit application is accepted they may even where relevant decide on the limit and interest rate you are going to be charged.

Credit scores work on a point system and a mathematical equation. Credit scoring looks at the information you provided on your application and the information posted on your credit history. The questions you fill out on the application are going to help the lender decide where you are financially and help them determine the credit score they will offer. Each section will have points and depending on the total number of those points you may be found credit worthy. The information provided is going to determine risk as well. The mathematical equation provides an area of study to assess the risk you pose to the lender. If you are a small risk generally your application will be approved for borrowing money.

Here are a few things the lender is going to look at. They will look at whether to give you the credit card or loan, what credit card limit to give you, and the interest rate they will charge. If you score reaches the pass mark you will most likely be offered the credit based on your application. If the score is not a pass mark you will be declined or there may be another option. In some cases your score may pose a risk, but they are willing to offer a smaller amount than you were hoping for to make the passing score. In this case it is usually the debt ratio that has caused the change in numbers. They may also elect to charge you a higher interest based on the risk you pose.

Each lender is going to have their own scoring system. This means that you may be turned down by one company, but the other company is going to offer you a loan or credit card. Generally you will find that to score the most points you have to be at a job for a long period of time, live at the same address for a certain period of time, and your age will have a factor. Your married status will also factor in to the mix. You of course don’t have to have all of these things to get a loan, but they do help. You will also find the information on your credit report is extremely important to your overall credit score. Having a good history usually improves your chances with the lending company as they see a low risk pattern, over the application information. So someone who pays their bills on time usually scores more points.