For the granting of credit, it is very common to hear about credit scores. However, what not everyone knows and / or is aware of is that it is through this tool that financial institutions calculate the risks before each credit release.
This risk percentage is obtained by means of a statistical calculation, which is based on the payment history of consumers, among other factors. The model is used in several countries. Therefore, it is very important that the consumer pay attention to him, in order to adopt good practices and benefit from the advantages of a high score.
In this article, we will talk about the topic and address the main information about what a credit score is and its relevance for those who make credit purchases. If you want to know more about the topic, read on and follow.
What is credit score?
The credit score is a metric used to analyze how consumers behave when paying their debts. It is from the data stored , centralization of bank services and in the Credit Protection Service that the score is calculated.
In a simple way, we can say that the score works from the ranking with a score ranging from 0 to 1000, the higher the score the greater the chances of approval of the credit application, as well as the conditions offered. Credit score classification works as follows:
- up to 300 points, the risk of default is high;
- between 300 and 700, the risk is medium;
- above 700, the risk is low.
These data are listed based on the default level of each region. In addition to this tool being used in several countries, the use of its metrics made the granting of credit more fair and uniform.
Based on this information, a study of the behavior of a given group of consumers with similar financial characteristics is carried out. In this way, the result of the score is obtained.
What are the factors that contribute to a low credit score?
The main factor that affects the score of a consumer’s score, of course, is default. This is because banks, stores and financial institutions expect not only to receive the loaned amount back, but also that the terms stipulated in contracts are met.
When this does not happen, the breach of the agreement signed causes confidence in the customer’s payment capacity to be shaken, which directly affects the score and makes it lower.
The reading that companies do is that the risk of default is great. Therefore, the tendency is for the credit application to be denied, and even when it is approved, it presents stricter terms of interest and payment terms. Some information is negative for the consumer, such as:
- participation in bankrupt companies;
- check without funds;
- negative name in credit protection companies;
- payment delays.
To prevent the credit score from decreasing, it is essential that the customer adopt sustainable consumption habits and spend strictly according to their ability to pay, according to their monthly earnings. For this, the ideal is to adopt consistent financial planning and be guided by it when making purchase decisions, in order to control spending and keep accounts in the blue. With focus and organization, this task is possible.
What are the benefits of the credit score?
At first, the idea of the credit score can scare the consumer, especially when he does not understand the logic by which the score is formed. However, even though it is a tool that analyzes consumers’ debts, the credit score has its good side, both for consumers and for companies.
For the consumer, it is important to be aware of your financial curriculum, that is, how you are seen by credit institutions, financial institutions, banks and stores. When you have this information, you have subsidies to adjust and align the payment of your debts. Knowing your score, it is easier to understand the consequences that a low score can have on your purchasing goals.
Another advantage is that, if the consumer finds that his score is low, it is possible for him to organize himself, pay off possible debts that are open and, from there, improve his position in the ranking.
For companies, the score brings certainty about receiving credit granted, which improves the predictability of resources and reduces the chances of losses. In addition, of course, companies contribute to insure society’s excessive indebtedness and encourage responsible credit.
Based on the score obtained in the score, organizations are able to analyze the consumer commitment index, thus knowing the chances that the customer has to honor with the payment of their debts. Check out some of the benefits of a good credit score score.