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Chapter 8: Problem 16

What are credit scores?

Short Answer

Expert verified
A credit score is a numerical expression representing a person's creditworthiness, used by lenders to assess the potential risk of lending money. It's influenced by factors such as payment history, amount owed, length of credit history, and types of credit in use.

Step by step solution

01

Define the concept

A credit score is a numerical expression based on a level analysis of a person's credit files, to represent the creditworthiness of that person. It is primarily based on a credit report, information typically sourced from credit bureaus.
02

Purpose of Credit Scores

Credit scores are primarily used by lenders (banks, credit card companies, etc.) to quantify the potential risk posed by lending money to consumers. This helps lenders assess whether to approve or deny an application for a loan or credit card, and on what terms (interest rates etc.). In other words, it helps lenders predict which customers are likely to repay a loan.
03

Factors influencing Credit Scores

Several factors influence credit scores including: payment history (do you pay your debts on time?), amount owed, length of credit history, new credit and types of credit in use (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts etc.).

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Most popular questions from this chapter

Suppose that you decide to buy a car for \(\$ 29,635\), including taxes and license fees. You saved \(\$ 9000\) for a down payment and can get a five-year car loan at \(6.62 \%\). Find the monthly payment and the total interest for the loan.

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In Exercises 11-18, a. Determine the periodic deposit. Round up to the nearest dollar. b. How much of the financial goal comes from deposits and how much comes from interest? $$ \begin{array}{|l|l|l|l|} \hline \$ \text { at the end of every three months } & 3.5 \% \text { compounded quarterly } & 5 \text { years } & \$ 20,000 \\ \hline \end{array} $$

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In Exercises 11-18, a. Determine the periodic deposit. Round up to the nearest dollar. b. How much of the financial goal comes from deposits and how much comes from interest? $$ \begin{array}{|l|l|l|l|} \hline \$ ? \text { at the end of each month } & 7.5 \% \text { compounded monthly } & 10 \text { years } & \$ 250,000 \\ \hline \end{array} $$
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