Understanding your credit score is important if you plan on applying for a loan and improving your credit profile. Read further to find out more about credit scores and how they could affect your financial plans.
What is a credit score and why is it important?
A credit score is a three-digit number, often between 300 and 850. Your credit score is calculated using a formula, taking into account your; payment history and the length of it, the balance owed, debt levels, and the number of credit accounts you have. This information is collated from credit reports put together by credit bureaus for lenders to assess. Credit scores range from exceptional to poor and can influence the interest rate you would be offered. Your credit score can also affect if your loan application is accepted or declined. It represents the risk that lenders take when you borrow money from them.
Credit Score Ranges
Credit scores range from the below;
- Under 300: No Credit
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very good
- 800-850: Excellent
Credit Score Rating - Under 300
If you haven’t yet opened any credit accounts, you do not have a credit history. This is a clean slate, so start building a good credit score as soon as you can.
Credit Score Rating - 300-579: Poor
Having a poor credit score is a result of having a damaged credit history from multiple defaults on different credit products and different lenders. Bankruptcy could also severely damage your credit score and can stay on your credit report for seven years. This poor credit score makes it very difficult to get new credit, so be sure to speak to a financial advisor on how to improve your score.
Credit Score Rating - 580-669: Fair
Being in the “fair” category can result from having a few negative impacts on your credit history, but no major problems. Interest rate options offered may be limited but are still available.
Credit Score Rating - 670-739: Good
A good credit score is an average score and will receive competitive interest rates. However, it could be more difficult to qualify for certain types of credit at ideal rates. You should compare different loan options to suit your circumstances.
Credit Score Rating - 740-799: Very good
This is an ideal credit score to have as it represents a lower risk rate to lenders, indicating that you are financially responsible with credit. To get this credit score, make your payments on time and never default on loans.
Credit Score Rating - 800-850: Excellent
Being consistently responsible with your repayments and managing your credit leads to an excellent credit score. You may receive lower interest rates on credit cards, loans, or mortgages as you are considered very low risk for defaulting and late payments.
How to monitor your credit score
Checking your credit score is free and doesn’t impact your score. You decide when to check your score; either weekly, monthly or annually. Any of the major credit bureaus offer free credit checks and a credit report once a year. There are also other free credit check sites available online.
What can hurt your credit score
- Late payments: set up a payment schedule to stay on time.
- Current debt: avoid having too many credit products, leading to more debt.
- Maxing credit cards: going over your credit card limit may show that you rely on credit too much.
- Hard inquiries: hard credit checks by lenders impact your credit score and can stay on your report for a while. Carefully assess whether applying for more credit is necessary.
- Opening and closing credit accounts: these can cause an initial slight drop in your credit score, however, can be recovered from.
Having a good to excellent credit score is essential so that if you need to take a personal, car, or home loan out, you get the best competitive interest rates. Pay special attention when making your payments on loans and how often you take credit out to ensure that your credit score stays in good standing.