It’s time for a change. You want a new credit card, car loan or a mortgage. Simple right? Not really. To reach those goals, lenders will be assessing your credit score.
But, what does this three digit number represent?
Educating yourself on your credit score is the first step to finding out. This guide will help you understand what a credit score is, credit score ranges and how it will impact your finances.
What is a credit score?
A credit score is a numerical value created from an analysis of an individual’s credit files. Credit pertains to any good or service you obtain before making payment. For example, you use electricity for your household and then pay the electric bill at a later date. Lenders use credit scores to evaluate their risk of loaning money to a customer and to assess any potential losses.
Lenders that use credit scores include:
- Banks (mortgage loan, line of credit)
- Credit card companies
- Car dealerships
- Insurance companies
Lenders assess how much to lend an applicant, at what interest rate and what credit limit. However, it is important to note that every lender has their own unique assessment to evaluate qualification which includes other parameters including debt to income ratio.
Even though lenders process of qualification varies, your credit score still plays a key role. The lower your score, the more risk you are for the lender. In turn, if you establish a good or excellent credit score, you will increase your chances of approval, better loans, and lower interest rates. In a nutshell, the higher your credit score, the better
Credit score range
Credit scores range between 300 – 850.
FICO and VantageScore generate the two most widely used credit scores. Both companies use similar information to determine a score however, their ratings are slightly different. FICO industry specific credit scores are created for particular lenders including auto lenders and credit card companies.
Credit Score Rankings
|FICO||FICO Industry Specific||VantageScore|
The average credit score in the United States was 704 (FICO 2018) and 675 (VantageScore mid 2017).
If you do not know your credit score, find out now for free. Credit Sesame offers VantageScore credit scores for free from TransUnion. They offer monthly updates so you can monitor if your credit score is increasing or decreasing. In addition, alerts are sent via email if an important change has occurred to your TransUnion credit report.
Question: You may be asking why do I need to know my credit score? Can’t I just apply for a bunch of different loans and credit cards see if I qualify?
Every time a lender or credit card issuer checks your credit score a hard inquiry is placed on your credit. This could affect your credit score by a few points or be negligible. When you have bad credit a few points can really add up. Also, multiple hard inquiries in a short period of time could target you as a higher risk applicant to lenders. Hard inquiries stay on your credit history for 2 years so you may want to consider space out credit card or loan applications.
How your credit score will impact you
Your credit score will definitely have an impact on achieving your financial goals. The possibility of becoming a homeowner, car owner or a life insurance policyholder is dependant on having a good credit score. Unless of course, you have liquid money to pay for those purchases.
At minimum, you want your credit score to be good – 670 or more. Below that, you will be severely impacted by either not qualifying or being offered high interest rates. Here is a breakdown of the impacts of your credit score, the good and bad.
In this instance, you most likely are overdue on multiple accounts. You have an active collections account. Your credit cards are maxed out and have had a judgement, repossession or bankruptcy file on your account.
Impact: Lenders will not approve you for a loan. You may be approved if you have a large deposit or down payment but this is best case scenario. Unfortunately, this could also impact your hiring potential if employers are looking at your credit score.
This may feel defeating however, if you are ready to work on raising your credit score, you will. Late payments are removed from your record after 7 years. You do have to practice patience, however, there are many easy changes you can make to improve your credit score.
Even with fair credit, you are still considered to have bad credit. You most likely have an account in collections, multiple late payments, had payments in collections in the past and could have had a bankruptcy file in the past.
Impact: Lenders will loan you money however, it will be very hard without a large deposit or collateral to secure the loan. Also, the loans that will be offered to you will cost more due to higher interest rates.
It is time to stop avoiding and get real with your finances. It will take some time and diligence, but of course, there are ways to build up your credit score. Start with looking for ways to increase your debt to credit ratio and make your minimum payments.
You have worked hard to produce a good credit history. You could have had a few late payments in the past and possibly a collections notice that you paid off. You also may have some credit card debt that you are working to pay off.
Impact: You will likely get approved for financial products and also could be able to shop around and compare options. You will be offered competitive interest rates. You will also be approved for insurance policies however, your premiums and rates will be higher than those with very good or excellent credit scores.
As long as you keep paying your accounts on time, you will continue to increase your credit score. There is still room to increase raise your credit score to get better financial products. Over time, your previous late payments and collections will be removed from your credit history having a lower impact on your credit score.
VERY GOOD/EXCELLENT CREDIT
You have been very responsible with your money and have a long standing credit history with zero late payments or collection accounts. You have also shown to be able to manage multiple types of credit including lines of credit, loans, and perhaps a mortgage.
Impact: You are consider a low risk customer and lenders will love you. You will be offered the best interest rates, lowest fees and best repayment terms. Insurance policies will be approved easily and you will get the best premium offers. As your credit score increases, so will the savings on your end. Employers will want to hire you showing yourself as personally and financially responsible.
If your credit score is very good, you could raise your credit score by reducing your debt to income ratio. However, regardless, you are in a great spot for the best financial product offers.
Learn more….Factors that Affect Your Credit Score