What is a credit score?

A credit score is a numerical expression of a person's creditworthiness, which reflects how likely they are to repay borrowed money. This score is derived from an individual's credit history, which includes factors such as payment history, amounts owed, length of credit history, types of credit utilized, and recent credit inquiries. Lenders use this score to evaluate the risk of lending money or extending credit to a borrower, influencing the types of loans and interest rates they may receive.

Understanding that the credit score serves this specific function is vital for personal finance management, as it can impact a person’s ability to secure loans, obtain credit cards, and even rent housing. A higher credit score generally indicates lower risk to lenders, often resulting in better loan terms and lower interest rates.