Credit scores are used by potential creditors and lenders, such as banks, financial services companies, home and other utility providers, to understand how risky it may be to lend money and do business with the borrower. High scores in standard credit score ranges indicate a relatively low likelihood of defaulting on loans and low risk for creditors. Lower scores, on the other hand, indicate greater risk in lending to that person or entity.
It is a standard practice among lenders to check a person’s credit scores, along with other information such as employment history and proof of income, to determine if it is safe to lend and if yes, then at what interest rate.
What are credit scores and how do they differ?
Your credit score is a testimony to your borrowing power, that is how much you can borrow to make important purchases and at what rate of interest. This score can make the difference between a loan being approved or declined. So it is worth understanding credit score ranges and how you can place yourself in the most favored range.
Calculated with a formula based on five variables: payment history, debt history, length of credit history, credit mix, and new credit, a credit score is a three-digit number, usually in the range of 350 to 750, that estimates how likely you will repay borrowed money and pay bills. The scores are calculated by credit-reporting agencies, on the basis of information collected from borrowers’ credit accounts which is compiled into their credit reports.
A higher credit score generally means you are eligible to enjoy lower interest rates, fees and deposits. A higher credit score also gives you access to more credit products at lower interest rates. Borrowers with 750+ credit scores have many options, including the ability to qualify for 0% financing on cars and 0% introductory annual interest rates for credit cards. This is a great opportunity as it can save the borrower thousands of dollars in interest over the lifetime of a loan.
So you must agree by now that it definitely pays a lot to have a high credit score.
An extremely low credit score, on the other hand, suggests a history of poor debt management, and payment defaults. This may cause creditors to decide against lending you money for major purchases. And even if they do, the interest rates could be quite high. This would, in turn, make the loan repayment difficult for you and might impact your future credit score.
Credit score ranges (as per credit bureau Equifax)
|800 – 850||Excellent|
|740 – 799||Very Good|
|670 – 739||Good|
|580 – 669||Fair|
|300 – 579||Poor|
How to improve your credit score
You can improve your creditworthiness by monitoring your financial behaviors. Individuals with low credit scores should make sure to pay all bills on time, bring down their debt levels, and maintain credit card balances under 30% of their limits, or lower. You can also help protect your credit against misuse by freezing your credit card. If you have not yet established credit, you can talk to lenders about the requirements for opening accounts and build a positive payment history.
While your credit score is based on a variety of factors to determine your loan eligibility and interest rate, the good news is credit scores are not fixed forever. You have the power to move to the top of credit score ranges by making good credit decisions. This can lead to a more positive credit history in the future and better borrowing opportunities. So, why not get started today?