Credit Score Terms Explained
To get a great car loan, you need to know about credit scoring so that you can improve your credit score. These are some of the most common credit score terms.
Algorithm
A complex mathematical model. In credit scoring, it is used to compare data in
millions of credit reports and predict a person's likelihood to repay debts.
Bankruptcy
A legal proceeding designed to help people in financial difficulty get a fresh
start by relieving them from having to pay their current debts. Bankruptcies
usually stay on a person's credit report for 10 years.
Charge-off
An unpaid portion of a bill that a lender has accepted will never be paid and
has recorded on the books as a bad debt. It is a serious negative item on a
credit report.
Collection
A creditor's attempt to recover a past-due payment by turning the account over
to a collection department or company. Having a debt in collection is a serious
negative item on a credit report.
Credit bureau
There are three main credit bureaus in the U.S.: Equifax, Trans Union and
Experian.
Credit history
A record of a person's use of credit over time.
Credit limit
The most that can be charged on a credit card or to a credit line.
Credit report
A document containing financial information about a person, focusing on his or
her history of paying obligations, such as a mortgage, car payment, utilities,
and credit cards. Also includes current balances on outstanding debts, the
individual's amount of available credit, public records such as bankruptcies,
and inquiries about credit from various companies.
Credit risk
The measure of a person's creditworthiness. People who are more likely to repay
their debts on time are considered a better risk by lenders, and will be charged
lower interest rates for borrowing money.
Debt-to-available-credit ratio
The amount of money a person has in outstanding debt, compared to the amount of
credit available on all of the individual's credit cards and credit lines. The
higher a person's debt to available credit, the more risky the individual
appears to potential lenders.
Default
A designation on a credit report that indicates a person has not paid a debt
that was owed. Accounts usually are listed as being in default after several
reports of delinquency. Defaults are a serious negative item on a credit report.