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25 need-to-know credit-scoring terms

As you learn about credit scoring, you may hear some new terms. This glossary covers commonly used words and phrases related to the industry.

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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: A credit-reporting agency that is a clearinghouse for information on the credit rating of individuals or firms. Often called a "credit repository" or a "consumer reporting agency." The three largest credit bureaus in the U.S. are Equifax, Experian and TransUnion.

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.

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