Many people have heard of bad credit, but some may not know what it means. For a long time, there was no established method for determining the credit activities of consumers. However, this all changed when a company called the Fair Isaac Corporation designed a credit scoring system that is called the FICO score. Because the three major credit agencies have different information on each consumer, the FICO score calculated by these agencies won’t be exact.
Your FICO score has become the best way to determine if your credit is good or bad. To get your store, the information in your credit report is compared to the credit reports of others. Your future credit activities can be determined by this information. When you apply for a loan, lenders will look at the FICO score to determine if they should allow you to borrow money. Having a low score doesn’t automatically mean you won’t be allowed to get a loan.
In the past, having any marks on your credit report would cause lenders not to loan you any money. They had no way of determining which borrowers would pay off their debts. With the advent of the FICO score, more people today who have had problems with their credit in the past are now able to apply for loans. Mathematical models allow lenders to study the behavior of borrowers to decide whom they should lend money to. Banks and credit card companies have taken advantage of this data by making offers to people who have different credit issues.
What is a Good Credit Score Range?
To familiarize you with a bit about bad and good credit scores, credit scores can range from as low as 300 to 850 and above. Bad credit scores generally range between 300 to 550 and can negatively affect your financial history. They pose a threat to potential lenders as they have a higher risk of a loan default while granting a loan to such an individual. Many lenders have expertise in this credit score range and they charge comparatively more fees to compensate for bearing the higher risk. As your credit score increases, loan approval becomes easier and simpler and competitively priced.
For a good credit score range, it should fall somewhere between 700-749. Credit scores above 750 are treated as Excellent (Well Qualified).
In short, those who have problems with their credit can usually apply for loans, but they can expect to have much higher interest rates. The FICO score ranges from about 300 to 850. The closer you are to 850, the better your score is. Statistics show that the average American has a credit score that is about 677. To qualify for loans that have the best interest rates and features, you will need to have a score that is at least 720. If you want to know your credit score, there are a number of services that will charge you a fee for it.
Your credit score can fluctuate throughout the year depending on your financial activity. So you are recommended to regularly check your score. Finding blunders and fixing them in time is the best way to keep adverse effects on credit scores away. The longer an error stays undisputed on your credit report, the harder it will be to fix it. You can also consult experts for tips on how to maintain good credit scores.
A number of factors go into calculating your score. The most important factor is your payment history. How you make your payments will determine about 35% of your score, which is almost half. Failing to make payments on time is one of the leading causes of getting bad credit. Your payment history includes payments on credit cards, loans, and other bills. Filing for bankruptcy can greatly lower your score.
The amount of money you owe will determine your score as well. People who have too many loans and credit cards will have a score that is lower. If you have a long credit history that is good, this will increase your score. Lenders are much more likely to give good loans to people who have established credit. It is important to understand the different things that affect your credit score because this could allow you to maintain a high score.
If your credit score is low, this means that you need to start making payments on time. If you have a large number of loans and credit cards, get rid of some of them. Being responsible for how you manage your credit will allow you to keep a high credit score. Lenders will be much more likely to give you the best rates and features on loans. Even if one lender rejects you, this doesn’t mean that all lenders will reject you. Understanding credit and how to manage it will allow you to remain financially successful.