What is a credit score?

A credit score is specifically defined as a score indicating an individual's capacity to repay loans. This score is derived from a person’s credit history, which includes factors such as timely payments of debts, the total amount of debt, types of credit utilized, length of credit history, and new credit inquiries. Lenders use this score as a crucial metric to assess the risk of lending money or extending credit to an individual.

Understanding a credit score is important because it influences various financial opportunities, such as loan approvals and interest rates. A good credit score typically enhances borrowing options and can lead to lower interest rates, while a low credit score may limit access to favorable credit arrangements. Thus, the essence of a credit score lies in its role as a reliable gauge of an individual's financial reliability and loan repayment capability.