What's a Good Credit Score?

Creditworthiness of a person decided by the statistical analysis of his/her credit files is known as a credit score. An optimum credit score is considered essential to get best rated loans. It shows your ability to return the money borrowed in specific amount of time. Good credit score demonstrates to the money lenders your trustworthiness, when it is about timely and regular repayments. It ensures them that their money is not going into the hands of a risky person or a business entity.

FICO - credit score rating

FICO or Fair Issac Corporation calculates credit ratings using 300-850 credit score rating system. A good credit score above 700 develops trust in that person and thereby he/she receives the best interest loan rates. In general, categorization of credit score is done in the following manner:

  • 579 or below (Very risky credit group): This range is considered risky by the lenders making it extremely difficult for the borrowers to get loans approved, whatever the amount is. Good professional advice must be taken to determine the ways to clear your debts and get better credit records.

  • 619 – 580 (Risky credit group): People with a credit rating in this group are charged extremely high interest rates for their loans.

  • 639 – 620 (Ok/Risky credit group): Lenders do provide loans between this credit range, but usually at a high rate of interest.

  • 679 – 640 (Moderate risk credit group): Loan approval is difficult but possible. Mortgages and large amount loan approvals are also possible within this group, but with difficulty.

  • 699 – 680 (Low risk credit group): Although loans get approved easily within this credit range, but not with the best interest loan rates.

  • 850 – 700 (Minimal risk credit group): Lowest interest rates are offered to the borrowers in this credit range. People with credit score above 730 are marked as dependable in the credit files.

Factors taken into consideration while calculating the credit scores

Five most important characteristics taken into consideration while calculating a credit score by the credit bureaus are:

  1. Debt payment history: Timely credit card payment history, past due accounts or any other negative account detail is used in the credit score calculation.

  2. Amount of debt due: Credit utilization ratio is calculated by the amount of money charged in comparison to the entire amount of borrowing limit. The lower the credit utilization ratio, the better is the credit score.

  3. Credit history length: A higher credit score is obtained if you can successfully handle credit for an extended time period. An inactive account also receives a low credit rating along with accounts over exceeding their credit limits.

  4. The amount of new debt you owe to the bank/financial institutions: If you apply for frequent loans or you open up new credit accounts, your credit range is going to suffer. However, the benefit of the doubt can be given to those shopping for a good rate of interest within a short window period of loan application.

  5. Type of debt and credit: Credit bureaus look for successful handling of all your credit situations and not just one. They compare your borrowing habits with your income. Be it a credit card, a charge card in a departmental store, a loan installment or any other credit utilization, everything is taken into consideration for your credit rating calculation.

Credit score being a symbol of your financial identity takes into account your past behavior with your credit amount to decide the credit score. Some of the factors that may end up in a small credit score are:

  • Past loan defaults

  • Past bankruptcies

  • Aberrant payments

  • Short sales

  • Improper credit use

  • Length of credit history, etc.

Ways to recover your credit score

In order to pick up a credit score, one must maintain a small debt ratio with their income and avoid overextended loan amount time.

  • With a low credit rating, loan approval becomes extremely difficult as a method to improve credit score. The best method in such case is applying for a regular credit card. Use a credit card for your regular purchases and pay the debt in a well-timed manner. Thus, the debt remains low and credit rating makes you dependable.

  • If possible, get an auto loan approved and repay the monthly installments timely. This will shoot up your credit score and show money returning potential in you.

  • A personal loan although difficult to obtain, is highly reflective of your credit usage and if paid back in timely monthly installments will definitely take back your credit score to the minimal risk range.

  • Get on with automatic bill pay scheduled to avoid late payments in the future.

  • Keep your debt as low as 30-40% against your borrowing limit, this ensures good credit habits and would certainly pick up your credit score.

How do lenders/banks/financial institutions look at your credit ratings?

Every person or business entity, who has borrowed some amount of money even if it was just once in the past possess a credit rating. The credit rating is the mirror of one’s ability to return the borrowed money in time.

Lenders will consider your credit rating to decide:

  • If they would lend you money or not?

  • If yes, then what would be the interest rate?

A person with good credit rating will receive loans easily and at the least possible interest rates in comparison to the person with poor credit rating. A FICO credit score of at least 650 or more is required to get loan approval easily otherwise get ready to pay larger down payments to show your creditworthiness.

An optimum credit score is very essential as the society revolves around credit utilization and borrowing instead of cash payment. In order to obtain an excellent credit score, an understanding of the credit score calculation and knowledge about what makes up the high-quality credit history is a must. This will increase an individual’s chance of obtaining credit and loans at the best rate of interest in the future.

Follow the above mentioned tips to ensure a good credit rating and enjoy credit freedom in your financial life!


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