If you’re interested in getting a loan for whatever reason, be it a start-up business, a new home, or maybe a car, then I’m sure you’ve heard of credit scores before. What is it exactly? Here we explain how credit scores work.
Your credit score is a statistically derived numeric expression of your “credit-worthiness” that is used by lenders as a basis to assess the likelihood that you will repay your debts. A credit score is based on a lot of factors, one of which include a person’s past credit history. It is a number between 300 and 850 – the higher the number, the more creditworthy the person is deemed to be. A good credit score is what each of us aspires to as it can mean the difference between being denied or approved for credit, and a low or high interest rate.
A Fair Isaac Corporation (FICO) score and the latest version of the VantageScoreis the most widely used credit scoring system. These are just two companies that provide credit score models to financial institutions but there are other providers of out there as well. The scoring system is showed below:
- Excellent Credit: 781 – 850
- Good Credit: 661-780
- Fair Credit: 601-660
- Poor Credit: 501-600
- Bad Credit: below 500
However, each lender will have their own definitions of what is a good credit score. One lender might only approve applicants with credit scores of 680 or higher while another will prefer scores of 750 or higher. It really depends on a case to case basis.
What to do then? Consumers can typically keep their credit scores high by keeping sure to always pay their bills on time and not having too much debt. So yes, it is important to maintain a good credit score as it plays a large role in a lender’s decision to approve the loan or not.