For years, creditors and lenders have been using credit scoring systems to determine whether you are a good risk for credit cards, auto loans, and mortgages. These days, many more types of businesses, including insurance companies and phone companies, are using credit scores to decide whether to approve you for a loan or service and on what terms.
A statistical formula is then used to compare this information to the credit performance of consumers with similar profiles, awarding points for each factor. A total number of points – a credit score – helps predict how creditworthy you are; that is, how likely it is that you will repay a loan and make payments on time.
Generally, consumers who are good credit risks have higher credit scores.
Different lenders use different scoring formulas, so your score can vary from lender to lender.
Usually a higher score makes it easier to qualify for a loan and means a better rate of interest. Lower interest rates usually translate into smaller monthly payments. Most scores range from 300-850, although there is one scoring method that uses a range from 501-990.