Understanding Credit
Section 1 - Understanding your credit score
The credit scoring system used by lenders and other institutions is a mathematical evaluation concerning
someone's use of credit. The mathematical formulas may vary slightly among the different rating agencies
but the concept is still the same. The scoring model takes into account the different types of credit a
consumer uses such as mortgages for real estate, installment loans for automobiles, education loans for
college, general unsecured credit for credit cards, utilities etc.
Anytime a consumer buys an item on credit or opens an account such as a cell phone or cable television account there is
always the possibility that any late payments will be reported to a credit bureau. The reporting by any source of late
payments will have a negative impact on a person's credit score.
The credit score models take into account how much credit is available and how much of the available credit is being used.
In addition, these models factor in any negative reports about a person's willingness to pay their accounts on time. The
weight that any one item has on the overall score may change with the economic times. Where at one point, the mortgage
history was the highest impact factor on the credit score, the use of credit card debt seems to be more important as we
enter into 2008.
The scoring models then take into account all the financial variables concerning how a person manages their payments and
determines a mathematical score. The score ranges in value from a low of 350 to a high of 850 at this point in time.
Obviously, the lower the score the less likely someone has managed their financial affairs in a timely and prudent manner.
Section 2 - Why credit scores are so important
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