Cracking the Code

Credit Scoring: Definition and Role in Loan Decisions

Are you looking to get a mortgage or need a loan to buy a new car? When you apply for any type of loan, banks will consider your credit score. It is a number that tells them about your financial fitness and gives them insight into your ability to repay your loan.

What is a Credit Score?

A credit score is a three-digit number that ranges from 300 to 900. It is calculated based on your credit history. It takes into account various factors, such as your payment history, outstanding balances, recent credit inquiries, and your credit mix.

For example, if you have always made your payments on time and your balances are low, your credit score will be high. On the other hand, if you have late payments or high balances, your score will be low.

Role of Credit Scores in Loan Decisions

Banks use credit scores to assess your risk as a borrower. They want to make sure that you are likely to repay your loan. A high credit score indicates that you are a low-risk borrower and that you are likely to be approved for a loan. A low credit score indicates that you are a high-risk borrower and that you may be denied a loan or charged a higher interest rate.