Everybody has a credit score, and it can range from poor to excellent. Most people have an average score when it comes to their credit. When you get approved online or at a local department store for a credit card, or if you pre-qualify for a car loan, it is because the company has checked your credit score. Each of the three bureaus has their own number scoring system, so the scores could vary from report to report.
The chances of having a good score on the scale are great if you have recently been approved for a loan. Most companies won't loan money unless a credit score is at least average. A credit score is a number that is produced by a calculated algorithm, which is a formula that is based on information from a credit report. Most people think a credit score is not important, but this is where they are mistaken. A high credit score is required, especially if people want to take out a loan or buy a home. The better your credit score is on the scale, then the lower interest rate you will receive.
If a person has a high number on a credit score scale, then lenders have no problem supplying the person with the funds they need. However, this is contingent on what their debt to income ratio is as well. A person has to make enough money to pay the loan back before it will be approved no matter what their credit score is.
The most popular scoring scale is the FICO; most lenders use this method more than any other. This is because of the leniency of the scaling system, which runs from three hundred to eight hundred and fifty. A score below six hundred is considered bad credit, while a score of 700 hundred or more is usually considered excellent. Getting the maximum score can be achieved, but it is difficult to do for most people.
The credit score scale helps inform a lender if you are a risk to them if they decide to give you a loan. Having a high score is what people want. The higher numbers you have, then the better chance you have at saving money because you aren't paying such high interest rates on your loans. Keep in mind that some lenders will approve consumer loans that have less than stellar credit scores, but if your numbers are low on the scale, then you may be paying a fortune in interest.
Credit scores and credit reports should not be confused with one another. A credit score is tabulated by using the information on your credit report. There are formulas that are used to come up with your exact credit score that have nothing to do with your credit report. A credit report is simply your credit information. While the credit agencies claim that the formulas used to calculate the scores aren't top secret, not much is known about how much weight each section of the reports carry. Keeping your score high is important to your financial health.
Credit Score Scale
Credit score is a measurement system, which is usually verified by banks, lenders, or financial institutions to estimate the financial health and repayment potentials of a borrower. The loan amounts and the approval decisions are basically made according to the credit scores. That is the main reason why everyone tries hard to maintain a good credit history.
Financial requirements could arise any time in our lives, and they could take us by complete surprise. For example, you or somebody in your family could suddenly fall ill, or you might decide to go for a new vehicle or a home. Therefore, good credit ratings are always an essential part of our personal financial management. Basically, the credit score is meant for estimating your creditworthiness in the market.
If your financial ratings are good, then you will not have to worry too much about getting loans or about paying high interest rates. The lenders or the banks will be more than happy to offer you with financial assistance, at attractive interest rates.
On the other hand, the banks will simply decline to approve your loan application, or they might charge you with high interest rates if your credit scores are way below the required mark on the scale. Understandably, the lenders will first think about the risk factors that are involved with providing loans to people with poor credit standing. They wouldn't want to lose money by giving away loans to people who fall in that category.
Where do you stand?
Unlike the usual measurement scales, the credit score range does not start from 0 or 1. It starts at 300 and ends with 850. If you’re planning to take a loan, then you could check for yourselves where you stand.
Let us now look at the breakup of credit score classification:
· If your credit score ranges in between 700 to 850, then your score is considered to be excellent. Any bank or financial institution will be more than glad to stretch out their helping hand to you, whenever you require financial assistance.
· If your credit score ranges in between 680 to 699, then your score is considered to be good. Even in this category, you should be able to procure loans easily.
· If your credit score ranges in between 620 to 679, then your score is considered to be average. If you fall into this category, banks might be a little reluctant to provide you with financial assistance. However, the private players will offer loans to you, after a thorough verification process.
· If your credit score ranges in between 580 to 619, then your score is considered to be low. If your financial standings belong to this category, then it is recommended for you to go for secured loans by pledging some collateral. Even if you are offered with a loan, it will surely come with high interest rates.
· If your credit score ranges in between 500 to 579, then your score is considered to be poor. If you fall in this category, you will have to work really hard to rebuild your credibility or financial standing. Getting unsecured loan in this category is simply out of question.
· If your credit score ranges in between 300 to 499, then the score is considered to be bad. Getting loans with this kind of score is almost next to impossible. Secured loans could be your only option. Rebuilding your credit history from here will be a real uphill task, and you will probably need to work towards it for at least a few years.
FICO is the company, which came out with the mathematical calculations to determine the credit score range. Thus, it is often referred to as the FICO score. It is calculated on the basis of various factors such as late payments, missed payments, how many open accounts you have, length your credit history, bankruptcies, etc.
The rate of interest offered to you will vary slightly from one lending agency to other, but it is always decided according to your credit scores. Your credit score keeps on changing if you take a home mortgage loan. However, it will improve again with regular repayments, but it will slide further down if you fail to make your repayments on time.
If your credit score is around 750, the lenders will approve financial assistance with low rate of interests. In fact, they will even treat you as a privileged client. If your credit score is in between 680 to 689, the lenders will approve your loan request with normal rate of interests.
If your credit score is low, then you should ideally stop applying for loans. Not only will the lenders not approve your request, their rejections will affect your credit score in such a way that it will go further down. You will need to first try and improve your credit standing, before thinking of applying for a new loan.
Your credit history will be usually verified by insurance companies, creditors, cell phone companies, utility companies, landlords, etc. Your scores and your past payment history will act as the good determinants for scoring new agreements. It is basically considered as a report card of your financial status.
Most of the financial institutions check your punctuality on repayments, integrity, employment stability, and accountability, before approving the loan to you. According to FICO, 5% of population are living with a credit score below 550, and 10% general population are living with a credit score above 800.
The lenders, credit card companies, and banks, are always in touch with the credit reporting agencies. If you pay back the money on time, then these agencies will update your report with a higher standing. If you fail to pay back the money on time, then your report will naturally attract negative scoring.
Banks and lending institutions will always want to leave their money in good hands, and earn on interests. So, if anyone fails to repay them, then it obviously is going to be a loss for them. They might even assign the collection responsibilities to the third parties. They will keep calling you repeatedly, and you will face a lot of harassment and embarrassment. It will also be a very uncomfortable situation for your family members. If you find it difficult to handle your financial matters, then it would be best for you to consult a financial adviser for help.