Benjamin Franklin said that “creditors have better memories than debtors.” But that was before computers. Nowadays, you have instant access to your credit history. You can see what the lenders see, and we can help you understand what your credit score means.
Many consumers do not understand the meaning behind their credit score. It is a three-digit number that determines the likelihood of one’s loan repayment capabilities.
There are three main credit bureaus that use your personal financial information to determine your credit score. These are Experian, Transunion, and Equifax.
A low credit score may keep you from receiving a loan offer, or at least make your interest rates higher. In addition, landlords may use the credit score to determine your ability to make monthly payments.
High credit scores open a gateway to beneficial credit products, plus lower interest. In fact, borrowers with scores ranging from 750 and more may receive valuable financial services, even low percentage financing on cars and credit cards.
Lenders, banks, card issuers, and other financial institutions check your credit. Certain loan applicants prefer to check their own credit beforehand in order to head through the application prepared.
Your credit score ratings fluctuate depending on your past financial decisions and current debt actions.
There are several different credit score ratings, ranging from poor to exceptional. What is the lowest credit score? 300 is the worst score.
How high does your credit need to be in order to ensure fast approval? Anything above 750 may warrant a fast approval, assuming ideal circumstances. Consumers who fall into higher ranges may be privy to better credit options.
Credit levels ranging from 300 to 579 are considered very poor ratings. Loan applicants may be required to pay a fee or even a deposit before receiving a loan. In some instances, customers holding very poor scores may not be considered for a loan whatsoever. Scores in this field may be the result of many defaults on various credit accounts. Other factors, such as bankruptcy and foreclosures, can be the reason behind poor credit.
Credit levels ranging from 580 to 669 are known as fair. They are often considered subprime candidates, and high-interest rates and fees are not uncommon for them. Consumers in this category may have a few quirks in their credit history, but they may not have any major setbacks. Although their options may be limited, they are sometimes able to find reliable loan products, such as cash advances.
Credit levels ranging from 670 to 739 are rated as good scores. Lenders see candidates within this range as less likely to fall behind on payments, and they may be more likely to offer them a loan with lower interest rates.
Credit levels ranging from 740 to 779 are very good scores. Applicants with credit scores falling within this range might be more likely than others to receive better interest rates from lenders. These credit score holders are considered to be financially stable and responsible individuals fit for loans. This means that most of their significant payments, such as credit cards, utilities, rent, loan repayments, are completed on time. For these reasons, they are ideal for a competitive interest rate.
Credit levels ranging from 800 to 850 are regarded as an exceptional group, having earned the highest credit score. These applicants often receive the best rates on the market. They have a credit history with no late payments and low credit card balances. Loan products from mortgages, credit cards, and credit lines are often granted to them with a low-interest rate. An excellent credit score is a gateway to qualify for a personal loan, as the impeccable score may help them avoid collateral.
Not everyone falls into one of the ranges listed above. For instance, those without a credit history may not be considered an “exceptional” candidate by most risk assessment models.
Many factors contribute to one’s credit score. You can use a credit score calculator to get an idea of where you are right now, or you can request a copy of your report for free once per year from each of the main bureaus.
When determining your score, a credit bureau may consider the following information:
Keep in mind that lenders take different approaches to determine credit worthiness; however, the following areas tend to be considered during the credit decision process and are most definitely involved in determining your score:
Your payment history is one of the first things that creditors look at. They focus on whether you have any missed payments. It is important to note that it is not enough to have eventually repaid your past loans; lenders always pay close attention to if you missed any payments along the way.
The payment history includes credit cards, retail department store accounts, installment loans, auto loans, mortgage loans, home equity loans, student loans, and so on. Basically, any form of cash borrowing you have done from a reputable financial institution might be recorded in your history.
The payment history also depicts the reviewer any late payments, bankruptcies, and collection information. All of these factors reflect poorly on your record, thus indicating increased credit risk.
Other considerations taken into account include:
Aside from the delinquent manners, the ratio to which you were missing payments is also taken into consideration when formulating your credit score. Meaning, if you hold ten credit accounts and have missed a payment on five of those, then chances are this will not reflect well on your score. If, in any case, throughout your financial past, you have declared bankruptcy, foreclosures were issued, or accounts have been reported to collection agencies, then this will negatively impact your history.
Another important part of your credit score value is the amount of credit that you have consumed. Lenders pay close attention to whether you are continually reaching your credit limit. It is essential to show responsibility when getting a loan. Lenders want to know that the money granted will not be spent haphazardly.
Lenders may also consider the rate at which you tend to repay a borrowed amount. For instance, it is not ideal to only make minimum monthly payments when you have reached your limit. Refrain from maxing out your credit cards, and make sure to pay a little more than the minimum when the monthly schedule hits.
It is not enough to check your credit history and repayments on each account to determine your creditworthiness. Lenders also may review the types of credit you have sought out over the past. This involves revolving debts such as credit cards and installment loans. This means that a healthy mix of each type is preferred. In other words, holding just credit cards with a perfect score is not recommended. Creditors would like to see your approach to larger and significantly heftier debts to determine your financial capabilities.
Credit score evaluators also consider the number of new credit accounts obtained recently. Entering into a joint loan with a friend or relative can count against you here. That’s why it’s important to consider your own loan plans before agreeing to be a guarantor.
It can be better to keep accounts open for long periods than to close them quickly. It is important for lenders to see that you have the financial means to close off the debts on time without having to go overboard on the time period dedicated, but it is also important for them to see that you can make regular payments over a long period.
A hard inquiry occurs when a lender checks your credit score. It can happen when you apply for a loan, and it can result in your credit score getting lower.
Don’t worry too much about the pulls hurting your score if you are on the hunt for a reasonable auto loan or mortgage loan. A series of loan applications within a short time frame is considered as one inquiry. The time frame can be anywhere from 14 days to 45 days.
A soft pull is not considered a hard check. In fact, you can use a soft pull to check your own score. This will result in no significant change to your overall credit score level.
Requesting money with a good credit score does not necessarily guarantee immediate approval with a reasonable interest rate. And the same goes for a low credit score holder: this does not dictate your ability to receive a loan.
Income and other factors, such as the debt to income ratio, are essential characteristics in determining the lending decision. Lenders tend to consider what you owe in comparison to what you earn and have accumulated as assets. The debt-to-income ratio helps determine whether the borrower still has room in their financial budget to squeeze in another loan.
In fact, approval decisions for payday loans are sometimes based on the borrower’s income rather than just their credit score. The short-term loans may offer quick cash funds to those in need of finances without having their credit scores stand in the way.
A credit score encompasses a large variety of factors to help creditors determine your creditworthiness. A lender may also use the number to help set the interest rate and terms of the loan. You should be able to improve your credit score with a carefully regimented plan to pay back bills and a well-budgeted repayment program for your loans.