When you need to purchase a home or carry out other big projects, you may have to get a loan. It will require applying for a loan from a bank or a lender. One factor that banks and money lenders consider when approving a loan is the credit score of the applicant. Thus, it is essential to know about your credit score and how it affects your financial life.
What is a Credit score?
A credit score is a numerical figure used to determine your creditworthiness. It is usually a 3 figure number, and it is used to predict your likeliness of repaying a loan. Thus, banks and money lenders always look for your credit score before approving a loan. The higher the number on your credit score, the lower the risk of default. It is right to mention that a good credit score does not guarantee that you will get the loan. There are other factors a bank or money lender consider before giving out a loan, but your credit score is an essential factor.
Different Types of Credit Scores:
It has been mentioned earlier that the credit score appears as a 3 figure digit. Different credit bureaus have their stipulated credit scores. The number ranges from 300 to 900. The reason why different credit bureaus have different numbers is that they collect their data from various sources.
Experian Credit Score Range:
The credit score from Experian is 570 to 850.
- Poor Credit Score – 570 and Below
- Fair credit score – 580 to 660
- Good credit score – 670 to 730
- Very good credit score- 740 to 790
- Excellent Credit Score- 800 to 850
FICO Credit Score Range:
The credit Score for FICO is 300 to 850
- Poor – 300 to 579
- Fair -580 to 669
- Good- 670 to 739
- Very Good – 740 to 799
- Exceptional – 800 to 850.
Vantage Credit Score Range:
The credit score for Vantage is 300 to 850
- Very Poor – 300 to 569
- Poor – 550 to 649
- Fair – 650 to 699
- Good – 700 to 749
- Excellent- 750 to 850.
Credit scores by other credit bureaus include:
Equifax: Credit score range of 300 to 500
Transunion: Credit Score Range of 300 to 850
Factors Considered when Calculating Credit Score:
a. Credit History: A credit history is a report or a record that shows repayment for old debts. It is usually displayed in a credit report. It shows details of borrower’s repayments of old loans. Your credit history is one major factor that is considered when calculating your credit score.
b. Payment History: Your payment history shows the details of payments you made for old debts. It shows the amount paid and the time of payment. An important factor that lenders look for in your payment history is the time of repayment. If your payment history shows that you made the repayments after the due date, then it will reflect negatively after your credit score.
c. Credit Limits: Your credit limit and how much you spent from the credit limit also determines your credit score.
d. Amount of Debt You Owe: The amount you owe in existing debt also determines your credit score. A higher amount in debt will affect your credit score negatively.
e. Types of Debt: The type of debt also matters. The debt can be an auto loan, a mortgage or a credit card debt.
Effects of your Credit Score on your Financial Life:
a. Loans: It has been mentioned severally in this post that your credit score affects your loan approval. You have a higher chance of obtaining a loan with a good credit score.
b. Insurance: Most insurance companies request for credit score. If you have a bad credit score, you will most likely pay a higher premium for your insurance.
c. Housing: Landlords these days ask for credit score before renting out an apartment. The credit score will show if you can keep with paying your rent regularly.
How to Boost Your Credit Score:
What if you find yourself in a position where your credit score is on the average on less than that? If your credit score is less than average, then you need to take steps to boost or build your credit score. It will take some time for this to happen but these tips will help reflect positively on your credit score.
1. Pay off Current Debts:
Instead of taking out new loans, it is best to work on paying off current debts. This post outlines tips to help you pay off your credit card debt in less than 12 months. Paying off old debts will go a long way to boost your current credit score. While at it, hold off taking new loans.
2. Keep Your Credit Card Balance Low:
Your credit card balance is the amount you owe a credit card company. At all times, always ensure that you keep your credit card balance on the low side. A high balance on your credit card will lower your credit score.
3. Pay Bills on Time:
The time within which you pay your bills is another factor that determines your credit score. Thus, you have to ensure that you pay your essentials bills on time. If possible, you can set a reminder a couple of days before the due date to pay the bill.
4. Keep Old Accounts:
Always ensure that you have old credit accounts. It is easier to determine your credit history with an old credit account. Thus, if you wish to cancel a credit card, ensure you cancel new credit accounts.
5. Apply for a Credit Card:
You need a credit card to build a credit history. Thus, it is necessary to apply for and obtain a credit card. This post outlines the process of getting a credit card. Always ensure that you maintain a low balance on your credit card.
6. Limit the Number of Credit Cards:
Some people have the habit of obtaining several credit cards. Several new credit cards won’t boost your credit score. Instead, it has the opposite effect on your credit score. Thus, avoid opening new credit accounts and instead work on maintaining older accounts.