One of the most important indicators of your ability to borrow is your credit score. By looking at your credit score, lenders can determine how responsible you are with credit. The higher your credit score, the easier it will be for you to get new loans or lines of credit. Higher credit scores can also lead to lower interest rates when you borrow.
But let’s dig a little deeper.
What is a Credit Score?
A credit score derives from specific information on your credit report. Lenders use your credit score to predict your ability to repay future debt. There is no set rule for how lenders interpret and use your credit score, and every lender interprets it differently.
What Makes Up Your Credit Score?
To calculate your credit score, companies use a mathematical formula, known as a scoring model, based on information in your credit report.
Some factors that make up a typical credit score include:
- Your bill-paying history
- Your current unpaid debt
- How many and what types of loan accounts you have
- Approximately how long you have had your loans
- How much total available credit you have
- New applications for credit
- What debts you owe, whether you have had a foreclosure or bankruptcy, and how recently it occurred
Most credit scores range from 300–850, but you may see a different credit score depending on where you pull your numbers.
For example, your credit score company may show your score as a 726, but a monitoring service may display it as a 698, and an auto lender considering an application may come back with a 711.
How Does My Credit Score Work?
Credit scores can play a significant role in determining which lenders will grant you credit and how much they charge you in interest. In general, a higher credit score makes it easier to qualify for a loan and may result in a better interest rate.
To compensate themselves for taking on more risk, lending institutions often charge higher interest rates for subprime mortgages. Credit scores less than 640, for example, are generally considered subprime. Some lenders will also require a shorter repayment term or a co-signer for borrowers with low credit scores.
On the other hand, a credit score of 700 or above is typically reasonable. It can result in a borrower receiving a lower interest rate, which results in them paying less interest over the life of the loan. Scores higher than 800 are considered excellent. Every creditor determines its ranges for credit scores, but the average FICO score is the standard.
- Excellent: 800 to 850
- Very Good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
Why Does a Good Credit Score Matter?
An excellent credit score can save most people hundreds of thousands of dollars throughout their lives. A person with excellent credit is more likely to qualify for lower interest rates on mortgages, auto loans, and everything else that involves financing. Those with better credit ratings are lower-risk borrowers, and more banks compete for their business, offering better rates, fees, and perks.
Meanwhile, borrowers with poor credit ratings are higher-risk borrowers, resulting in fewer lenders competing for their business and more businesses getting away with charging criminally high annual percentage rates (APRs). Poor credit scores can make it more difficult for you to find rental housing, rent a car, and even obtain life insurance because your credit score affects your insurance score.
If you need help raising your credit score, contact Briteside Solutions. We offer Financial Education courses and Credit Education to help establish and set up a roadmap to help you achieve your long-term financial goals.