Credit reports are an important source of information related to your financial history and status.

Credit score is a reflection of how likely a loan taker is to repay his/her loan in the given time. It means how good a prospect you are to the lender as a borrower of their money.

Every lender has to incur the risk of bad debt – the money is lent to someone but does not come back. To assess the borrowers for their ability to repay, a number of factors are taken into account using statistical methods. Comparisons are made with similar other customer profiles, and a score generated that is supposed to reflect your credit worthiness. Of course, things may still go wrong, as the financial world is quite unpredictable. But a score like this can help a lender to minimize his risk by studying the borrowers' profile.

Factors that are usually taken into account include – your salary, existing loans, job profile and tenure, previous loan history, other financial assets such as property, etc. This profile is compared with profiles of similar customers and a score generated. This is your credit score.

Three major credit report generating companies in the US are: Experian, Equifax and Trans Union. The scores are normalized, so that your score of Experian would be the same at the other two, though different methods have been used. A new federal law makes it mandatory for these three agencies to provide one free credit report to a customer.

The normal range is between 350 – 900. A score of 650+ is considered a good score. Below this level, the lender may run more checks on your background and current financial situation. A good score helps you to quickly get a loan at the best interest rates.

The credit score methods were first developed in the 1950s by the three above-mentioned companies and have now become standard tools of trade in the mortgage sector. Though you need a good score to get good interest quotes, a low score does not disqualify you to obtain a loan. It only lengthens the process, and the interest rate may not be the one desired by you.

A good credit report can save you thousands of dollars over time as it builds trust and gets you cheaper interest rates.

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