How does the credit score work?

The credit score is a method established by the market to assess the risk of default in all types of financing. It is this methodology that guides the decisions of the largest banks, finance companies and credit card companies around the world.

The credit score is very important when applying for loans, financing or even a consortium, and can be decisive for obtaining credit, as creditors need to be sure that the debt will be paid.

To protect themselves from default and ensure that the individual or legal entity will be able to pay off the debt through their personal finances, financial institutions use the credit score as a tool to measure the chances of a debtor paying or not paying what he owes.

In this post, we will explain how the credit score works and how to proceed to improve the score, increasing the chances of getting credit.

What is the credit score concept

It is a score given by financial institutions to those who apply for credit. It is based on the applicant’s financial history to calculate the risks of granting credit and determine whether the customer has a good creditor profile in the market. The higher the score, the better the conditions for obtaining credit from operators.

To obtain the score, data such as profession, age, marital status, income and address of the applicant are used. Other registration information, such as protests, bad checks, lawsuits and financial pending issues also help support the credit score.

Financial institutions take into account some variables to calculate the risks involved in granting credit, such as the probability of default, that is, the chance that the debtor will not pay his debt; the bank’s exposure to default and the financial loss in the event of default. All these factors can positively or negatively affect the concession.

What the credit score does, in practice, is use public and available information provided by the consumer, as well as data related to credit behavior to formulate a statistical probability of default. Based on these numbers, a credit risk classification — or credit score — is created, which the creditor company will use to define its criteria.

This all helps institutions to identify the customer’s profile and ensure that the debt will be paid off. Having a good score helps you get credit at different interest rates and negotiate better business terms.

The benefits of the credit score for the customer

The credit score actually seeks to help both sides — consumers and entrepreneurs — to do business on credit in a cheaper, more agile and much safer way. By intelligently supporting the decisions for granting credit, the tool also protects the customer by preventing him from making commitments that he may not be able to honor later on.

What to do to improve your score

The best way to score better on the credit score is to pay off debts. Paying bills on time, always leaving a margin in the credit card limit (and eliminating cards that are not being used frequently) are some of the tips to improve your score.

In addition, it is always good to remember: you should not apply for credit indefinitely, do so only if necessary. It is worth remembering, however, that having a good credit score does not necessarily guarantee obtaining credit, since it is the financial institution that beats the gavel on whether to grant or not, and each works with its own criteria.

In short, the better your reputation and track record, the more willing lenders are to extend credit at a competitive rate. So stay tuned and keep your debts regularized.

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