Understanding Your Credit Score: What You Need to Know
Lenders use credit scores to determine whether you qualify for a loan by considering your credit report, which they can source from credit bureaus.
To understand your credit score, you must know your range and the factors that can affect them, like payment history, length of credit, and new credit. These factors can help you get many potential lenders with the best terms and rates.
Here is what you need to know about credit scores.
What Is a Credit Score and How Does it Work?
A credit score is a number that lenders use to rate if someone is eligible for borrowing. A high credit score means you can be trusted by lenders, while a lesser credit score could expose you to higher interest rates or, even worse, reduce your chances of qualifying for a loan.
After applying for credit, including a mortgage, a car, or a loan, lenders will find out more about your credit risk, usually using FICO scores.
Using FICO scores, having a credit score of less than 640 puts you in the category of a "subprime borrower." And because of this, lenders will often charge you higher interest.
Why Lenders Use Credit Scores
Lenders use credit scores to determine whether you qualify for the loan and the likelihood you'll repay your loan in time. In other words, a credit score helps lenders get enough history about your credit risks and your eligibility for a loan.
How is a Credit Score Calculated?
The following factors are used to calculate your credit score:
1. Payment History
The maximum percentage of your payment history that determines your credit score is 35. Payment history includes whether you make repayments on time, how many payments you have missed recently, and how many days you take to repay your credits after the due date. If you repay over 30 days, your lender will report you, reducing your credit scores.
However, you can explore alternatives to get a quick cash loan to avoid lowering your credit score. If you want a fast cash loan, you can borrow money from cash app - a payment app that lends money to borrowers with less paperwork and quick approvals.
2. Total Amount Owed
How many loans or credit cards you owe makes up 30% of your credit score. It depends on the amount you owe, the kinds of accounts you have, the amount you owe, and the amount of credit you have available.
3. New Credit
New credit-total amount of new credit accounts makes up to 10% of your credit score. The report depends on the number of accounts you have recently opened — the higher the number of new accounts, the higher the chances of credit risk.
4. Types of Credit
The types of credits you have makes up to 10% of your credit score. Having different kinds of credit, from home loans to installment loans and retail and credit cards can affect your score positively or negatively. Different types of credit cards can increase your scores if you manage them well regarding payment history and other factors.
5. Length of Credit History
The length of your credit history makes up 15% of your credit history. If you have a more extended history of repaying your debts, you will have a high credit score and vice versa.
When evaluating the length of credit history, the average age of your credit is considered; therefore, it is always good to keep your accounts active and open.
What Is a Good Credit Score?
Credit scores range between 300 and 800— a good credit score ranges between 670 and 739. A good credit score means that you are eligible as a borrower, but it can vary, depending on various lenders, but it can vary, depending on multiple lenders. Some lenders can adjust the requirements needed for a borrower, depending on the current events.
Conclusion
Having a good credit score is cost-saving since you will get a high chance of getting low-interest rates, and you will not have to pay much money for any line of credit you take out.
To avoid having a poor credit score, you need to pay your debts on time, keep your credit cards open and active and also ensure that you deal with a good credit repair company.
