What is a credit score?

A credit score is a numerical representation of an individual's creditworthiness, reflecting their ability to repay borrowed funds. This score is derived from various factors, including payment history, credit utilization, types of credit in use, length of credit history, and new credit inquiries. Lenders and financial institutions use the credit score to assess the risk of lending money to a borrower. A higher credit score indicates a lower risk, which can lead to better loan terms, such as lower interest rates.

Understanding this concept is essential for managing personal finances, as a good credit score can significantly impact the terms of loans and credit offered to an individual.