Your Credit Score Determines the Availability of Credit...and the Cost

We apply for credit for many reasons -- maybe it's to buy a new car, house, computer, or get a student loan. Often when applying for a new job, the prospective employer will obtain and review your credit report. Did you know, however, that there is a special number that can determine whether you can do these things, or at least how much it will cost you? It may also determine if you'll get that job or big promotion. Your credit score is a three-digit number that can do just that. Moreover, insurance companies often use credit scores to determine Homeowners' and Auto insurance premiums. In Texas, before public outcry stopped the practice, a utility company suggested using credit score to determine electricity charges and rates!

A credit bureau gathers data from a multitude of sources: finance companies, mortgage holders, department stores, credit card companies, court records and the like. Until about 25 or 30 years ago, this collection of information was reported to the prospective lender without editorial comment. It was then up to the individual lender to make the determination if a loan was to be granted and, if so, the interest rate commensurate with the risk of non-payment.

The result was a very subjective determination that depended on the evaluation of the raw date by individual loan officers

A credit score is a number that is calculated based on your credit history to give lenders a simpler "lend/don't lend" answer for people who are applying for credit or loans. This number helps the lender identify the level of risk they may be taking if they lend to someone. While the same end result can come through reviewing the actual credit report (which lenders usually do), the credit score is quicker and less subjective. The system awards points based on information in the credit report, and the resulting score is compared to that of other consumers with similar profiles. With this information, lenders can predict how likely someone is to repay a loan and make payments on time. It's the credit score that makes it possible to get instant credit at places like electronics stores and department stores.