A credit score is a numerical snapshot of a borrower’s credit report at a particular time. It is used to help companies better understand a consumer’s financial health. The credit score is generated by a mathematical formula utilizing the data from that individual’s TransUnion credit history. Credit scoring represents the probability of an event happening in the future, but does not indicate that an event will necessarily happen.
A credit score can help you make more informed decisions, in addition to helping reduce inefficiencies associated with subjectivity, manual processes and insufficient information. It can also help reduce exposure to risk, comply with regulatory requirements and increase the profitability of your portfolio.
The credit scoring system became prevalent during the 1960s as a way for lenders to quickly evaluate a potential borrower's creditworthiness. The system was found to accurately predict financial risk over time and grew to several different industries. Now credit scoring is used by lenders, insurers, landlords, employers, and utility companies to evaluate customers’ credit behavior.
There are thousands of different credit scoring formulas, each developed for specific evaluation purposes. The basic credit scoring formula considers several factors from a consumer’s credit profile. The effect of each element can vary based on the credit history of that individual:
- Payment history—A good record of on-time payments will help boost a credit score.
- Outstanding debt—Balances above 50 percent of the consumer’s credit limits will harm credit. Generally, balances should be under 30 percent.
- Credit account history—An established credit history generally makes a borrower less risky.
- Recent inquiries—When a lender or business checks a consumer’s credit, it causes an inquiry to appear on the credit file. Consumers who apply for new credit in moderation are generally considered less risky than those who apply for credit more frequently.
- Types of credit—A healthy credit profile has a balanced mix of credit accounts and loans.