One of the qualifiers to get your loan approved by a lender is a good credit score. This is their basis for granting you the loan you applied for or reject it due to negative standing.
But what is a credit score and how this can affect your future loan applications?
Below are the basic things you need to understand about credit score and how maintaining a good one leaves you with financial advantages.
What is a credit score?
A credit score is a number based on information from your credit reports. Ranging from 300 to 850, with the latter as the highest, credit scores are used by banks to determine if your loan or credit card application is worthy of approval.
Lenders also use this as their basis for the interest rate to give to the borrower. A good credit score is also a determining factor in charges for auto insurances, housing loans, and many others. In a nutshell, a credit score determines one’s creditworthiness.
Who creates credit scores?
Two major companies create the majority of credit scores—Fair Isaac Corp., (FICO), and VantageScore Solutions. FICO, a publicly-traded company, produces FICO Scores through its credit scoring model while VantageScore is an independent company developed by major credit bureaus.
The two uses automation in generating scores, which makes lenders trust their service to expedite their research on an applicant’s credit history. A credit score is a simpler and more convenient way to assess one’s credit standing without consuming too much time. Credit scores vary from time to time as you make payments.
There are multiple scores for different types of lending purposes. FICO has specialized scores for auto loans, credit cards, and mortgages. The scores vary depending on the information the credit bureau supplies to their model.
What influences credit scores?
Several factors affect credit scores. It is vital to know these factors to make necessary adjustments on your part and keep your credit score satisfactory.
The major factor is payment history. It is important to strive for paying on or before the due date because late payments are mirrored to the credit history. This may eventually lead to low credit scores.
Credit utilization ratio
Another factor is the credit utilization ratio. The idea is that the lesser the amount you borrowed, the lesser risk you have in developing a low credit score. If a borrower always uses the credit available in large chunks, credit scores will like to go down too.
According to VantageScore, credit card balances should be kept below 30 percent of the credit limit. VantageScore also recommends keeping your credit card balances below 30 percent of their credit limits to avoid negative impacts on your credit score.
Length of credit history
Make sure to maintain an excellent track record with your lender. If your credit history shows that you sustain a borrow and repay relationship with your credit card company without red flags such as closing accounts, lenders can consider your loan application.
Credit history also reveals the types of loans you have acquired from the past, including auto loans, home loans, and personal loans. Lenders look at your paying behavior when it comes to dealing with different types of loans.
Where to check and buy credit scores?
To view your credit scores, you have to pay for it. But if you want to know without shedding bucks, you can ask the lender about yours during the loan application. VantageScore also has a list of partner sites that are free to access credit scores.
Meanwhile, you can earn credit scores by asking from credit card issuers. Ask your credit card company if they offer free scores. You can also purchase FICO credit scores using its website.
Keep in mind that a credit score is an essential factor for lenders to make decisions on your applications. Before planning one, start with improving your credit scores to maintain a higher probability of approval.
Based on Materials from The Balance