Last updated on August 9th, 2020 at 03:54 pm
The credit score is an indicator of the ability of an individual to payback the credit. It is the three-digit numerical representation of the person’s creditworthiness. The credit score exists in the range of 300 to 900.
The score that ranges between 600-800 is a considered as a good credit score. Whereas a score of 800 or above is considered to be unique. Higher credit scores imply better credit decisions, and it makes the creditors more confident. The better credit score assures that the borrower is going to repay the future debts as agreed.
Credit scores are used by the lenders, including banks that provide its customers with mortgage loans, car dealership financing auto purchases, and credit card companies, to make the critical decision whether or not to offer the individual’s credit and what the terms of the offer are going to be. Thus, a credit score helps to take vital decisions.
Why do Credit Scores Matter?
Credit scores act as an essential tool where the lenders anticipate if the individual is going to repay the loan on time or not. Credit scores are also known as risk scores because they assist the lenders in assessing the risk if the borrower can repay the debt as agreed.
Having good credit is extremely important as it decides whether the individual will qualify for a loan. A good credit score also means that the individual can get the cell phone service they want or rent the apartment that they need.
The individual can think of credit scores as a report card that the individual might review at the end of the school term, but here grades are not present, the individual’s activity ends up within a score range. However, unlike academic grades, the individual’s credit scores are not going to be stored as a part of their credit history.
Instead, the score of the individual is generated each time a lender requests it. Every time an individual sets a significant financial goal, such as buying a new car or becoming a homeowner, the credit score of the individual is likely to be a part of the respective financing picture. The credit score of the individual helps the lenders to determine whether or not the individual qualifies for a loan and how good the terms of the loan are going to be.
However, credit scores are generally not the only thing that the lenders pay attention to when deciding whether to extend the individual’s credit or offer him/her a loan. The individual’s credit report also contains the details which are taken into consideration, such as the types of credit in the individual’s report, the total amount of the debt that the individual has, any derogatory remarks that the individual may have and the length of the time the individual have had credit accounts.
Other than the individual’s credit scores and credit report, the lenders can also consider the individual’s total expenses against his/her monthly income, depending upon the type of loan that the individual is seeking.
Factors that Affect an Individual’s Credit Scores
The information that is going to impact an individual’s credit score is going to be different depending upon the scoring model that is being used. Credit scores are generally affected by the elements in the individual’s credit report, such as:
Bill Payment History
Bill payment history is one of the important components of a credit score. An individual with a good credit score pays all his bill within the deadline. Payment issues, like charge-offs, collections, bankruptcy, repossession, tax liens, or foreclosure can negatively impact the credit score, making it near impossible to get approved for any credit which depends on the good credits score.
Credit History Age
Age of an individual’s credit history also plays a major role in determining the credit score. The older the credit history the better the case for the individual as it shows that the person has good experience of holding the credit.
Credit score is also impacted by the no. of queries made by an individual for the credit. Though inquiry in the range of 1-4 does not impact the credit score but a substantial no. impacts the credit history in a negative way. So. it I always advisable to not not opt for credit inquiry in a short period of time.
Credit usage involves credit utilization rate. The utilization rate is the ratio of the total balance an individual owes to total credit limit on all your accounts. The lower the utilization rate the better the credit scores. Increasing the credit or leaving the part of balance unpaid can impact the credit score in a very bad way.
What to do If an Individual doesn’t have a Credit Score?
In some of the cases, the individual might not have enough credit history to have a credit score. Depending on an individual’s age, there are many different ways to establish credit.
If an individual is under 21, he/she should have a cosigner, or he/she should be able to demonstrate that the individual will be able to pay back any of the credit that will be extended. With responsible usage, a parent cosigning a credit card is a perfect way to help in establishing a positive credit history.
For others, the best way in which an individual can establish credit might be to work with the credit union or the bank to open an account with a small credit limit so that the individual can get started. Another way in which the individual can get started building his/her credit is by opening a secured credit card. Thus, with the help of proper account management and time, good credit history is within the individual’s reach.