May 10, 2021

Credit Scores Explained: Why Is Credit Scoring Important?

Credit Scores Explained: Why is Credit Scoring Important? 

credit scores

Get to understand everything there is to know about credit scores: the definition, history, credit score ranges, why is it important, and how it affects your credit profile. 

 

Understanding Credit Scores: What is a Credit Score? 

A credit score is a numerical value used to determine a person’s capacity to manage debt. Credit scores estimate how likely you can repay a new debt. Credit scores typically range from 350-800 and the higher the number is, the better the chances of getting a loan. It also determines how much interest you pay for a certain financial product. Higher credit scores mean paying lower interest rates on all loan producrs: auto loans, housing, or personal loans. 

 

How is a credit scoring system developed?

This credit scoring model was developed by Fair Isaac Corporation or now known as FICO. FICO is a major data analytics software company that provides products and services to both businesses and consumers. Although there are other credit scoring models, it is the most widely used by financial institutions. Ninety-five percent of the largest U.S. financial institutions are FICO clients, and the company has sold more than 100 billion credit scores since the creation of the scoring model. 

 

What is a good credit score?

Credit scores of 700 and above are considered good which means that the borrower can receive lower interest rates in the course of the loan’s life cycle. Someone’s credit score may also determine the amount of an initial deposit required to get a new loan, may it be for a new gadget, housing, business opportunities, and a variety of other reasons. Credit scores of 800 and greater is considered excellent based on the FICO Credit Scoring which most lenders and credit companies use. 

 

What Are the Different Credit Scoring Ranges?

Creditors frequently evaluate credit scores, especially when deciding whether to change an interest rate or credit limit on most credit cards. The following are the credit score ranges and see what a score means.

FICO Credit Scores Range

  • Excellent Credit Scores: 800 to 850
  • Very Good: 740 to 799
  • Good Credit Scores: 670 to 739
  • Fair: 580 to 669
  • Poor Credit Scores: 300 to 579

 

How to Check Credit Scores

Under Federal Law, anyone can have access to their credit reports for free at AnnualCreditReport.com. You can get a free credit report available once per year from all three major credit bureaus. The credit report doesn't often include credit scores, but there are other ways on how you can get it. If you're an account holder of a bank, you can ask whether they can provide your credit score for free as a customer. You can also ask the lender for your credit score when you apply for a new loan. 

 

How Credit Scores are Determined?

The three major credit reporting agencies in the US are Experian, Equifax, and Transunion. These agencies report, update and store the credit histories of consumers. While there are some differences in the information collected by these three credit agencies, there are five main factors evaluated when calculating credit scores. The borrower must take note of these factors especially if the goal is to increase credit scores faster. 

 

What Factors Affect your Credit Score?

 

FICO credit scores

Source: MyFICO Credit Score

 

1. Payment History

Payment history determines whether a borrower pays financial obligations on time, and it accounts for 35% of the credit score. How timely and how frequent you pay your debt can affect a major chunk of your credit score. 

 

2. Total Amount Owed

A borrower’s total amount owed contributes to 30% of the credit score and this is where “Credit Utilization Ratio” enters. It is defined as “the percentage of a borrower’s total available credit that is currently being utilized.” Lowering this ratio can help a borrower increase a credit score. It is best to keep this ratio at 30% or lower at all costs to get higher credit scores. 

 

3. Length of Credit History

The length of credit history accounts to 15% of the borrower’s credit score. The longer someone’s credit history is, the less risky it is. 

 

4. Types of Credit

The types of credit used by the borrower contribute 10% of the total credit score. This factor shows if a person has a mix of installment credits: from credit cards, mortgages, car loans, and anything involving credit. 

 

5. New Credit

The borrower’s most recent or new credit accounts for 10% of the credit score. This shows someone’s most recently opened credit accounts and the new type of credit applied. 

 

Why Having a Good Credit Score Is Important?

credit scores

Credit scores determine a person's creditworthiness or the capacity to repay debt. It is important to keep good credit scores for easier loan approval, lower interest rates, and more financial products offered. This means having a good credit score makes achieving your financial goals easier. 

A Good Credit Score Means Easier and More Access to Financial Products

People with good credit scores enjoy lower interest rates and faster loan approval. Borrowers with scores above 750 have a wide array of credit options available and can sometimes mean they can qualify for 0% financing on car loans or credit cards with 0% interest rates. Insurance companies also use credit-based scores to help determine someone's premiums for auto, home, and life insurance. 

People with Good Credit Scores Enjoy Lower Interest Rates on Loans

Maintaining a good credit score means enjoying lower interest rates on all types of loans. For instance, there is a difference between people with 670 vs. 720 credit scores in terms of monthly loan payments. Between the two, A 30-year fixed-rate $250,000 mortgage has a difference of $72 monthly or $26,071 over the course of the loan's lifetime. Imagine what you can do with that difference, may it be savings or investment.  

Good Credit Score Means Higher Chances of Approval for Renting Properties

Credit scores impact your everyday life in one way or another including a potential landlord's favor. For example, you are moving to a new town and you need a new apartment to rent. You found this listing online and you immediately contacted the owner. The owner then asked you to provide your credit report.  That's right, landlords may also use credit scores to help them decide whether to rent you a house or apartment. It helps them decide whether you're good at paying rent and how financially capable are you. 

Getting a Good Credit Score Increases the Chances of Getting Hired or Promoted

In some cases, employers review credit reports before actually hiring someone or deciding on a promotion. Of course, it's not the only factor but it can help you get that dream job you want. Having a good credit score means you are responsible enough to settle financial matters which means employers can also trust you with the job. 

 

What to Do if You Don't Have a Good Credit Score

Not all people have the luxury of having a good credit score and it's normal. Naturally, the only way to get a good credit score is to raise it. We have listed the ways on how to improve your credit score faster or you can work with us. 

Work with a Credit Repair Service to Increase Your Credit Score

Seeking professional help makes raising your credit score easy and fast because of the added training and experience. Working with a great credit repair service makes it even easier and faster. 

Save yourself the stress, headache, and time by consulting our credit repair professionals here at CreditPlanned. We guarantee to increase your credit score as early as 30 days, and we offer a FREE consultation. 

Book a free consultation today. 

 

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