What does a credit score measure?

A credit score specifically measures an individual's credit risk, which reflects the likelihood that a person will repay borrowed money. This score is determined based on various factors, such as payment history, amounts owed, length of credit history, types of credit in use, and new credit inquiries. Lenders use credit scores as a quick assessment tool to gauge the risk involved in lending money to an individual. A higher credit score indicates lower credit risk, suggesting that the individual is more likely to fulfill their financial obligations, while a lower score might indicate a higher risk. This makes a credit score a crucial component in the decision-making process for loans, credit cards, and even rental applications.

In contrast, while net worth, total debt owed, and income level are all important financial factors, they do not capture the specific aspect of a borrowing individual’s behavior and reliability in repaying debt that a credit score does.