There will come a time when we become financially unstable. This may be caused by different reasons such as fluctuation in the market if you’re a business owner, a cut on your paycheck if you’re earning a salary from a job, or a delay in your allowance if you’re still a student. However, the effects of such circumstances should not hinder you from providing your daily needs and wants.
If you are struggling to come up with the needed amount to provide for your needs, it might be a good idea to turn to a loan. Taking a loan will provide you money to cover your expenses. In return, you have to pay for what you borrowed with the added interest.
Normally, it would be easy for you to score a loan. However, your lender will evaluate your credit score as part of the process. Having stellar credit scores will make you appear more reliable to your lender.
If you want to know more about it, below are the things necessary for you to what is a credit score and other things you need to know about.
What is a credit score?
A credit score is a three-digit number that represents your entire financial life. Such a score is based on the timeliness of when you pay your debt or your bill, repay your loans, or pay off your credit card debt.
That said, if you pay your regular payments punctually, you will get a high credit score. The higher your credit score is, the more trustworthy you appear to lenders.
What are the ranges of credit scores?
There are plenty of basis for credit score ranges. However, one that is commonly used is the Fair Isaac Corporation or FICO score.
● For those with credit scores 579 and lower, they are in the poor bracket.
● 580-669 credit scores are described to have fair scores.
● Good credit scores range from 670-739.
● For very good credit scores, they are ranged from 740-799.
● Lastly, credit scores, which are 800 and above, are described to have exceptional credit scores.
What happens if you have a good credit score?
Naturally, if you have a good credit score, the lenders will see you as a trustworthy borrower. This means that they see you as someone who can pay their debt on time. As a result, the loans that lenders offer you have lower interest rates than bad credit loans.
Also, good credit loans are usually an unsecured type of loan, meaning you won’t have to hand over collateral for you to borrow the needed money.
What happens if you have a bad credit score?
Needless to say, having a bad credit score will make you appear as a threat to the business of lenders, as such score means that you don’t pay your debts that well. As a consequence, lenders will offer you a loan with a higher interest rate.
Also, bad credit loans
are offered as secured type of loan. This means that you have to offer collateral before you can have the amount that you want to borrow.
What is the difference between a credit score and a credit report?
A credit report is the compiled report of your financial and personal information. Here lies your address, name, and social security number. It also includes your liens, bankruptcies, bills, loans, and credit card accounts that are either closed or open.
With the use of your credit report, credit bureaus calculate your credit score. Your score will then be shared to different banks, credit unions, and lenders. Because there are multiple credit bureaus, you will also have multiple credit scores and credit reports.
How are credit scores calculated?
The FICO model of calculating your credit score is based on five primary factors of credit score.
Payment history has the most significant portion that affects your credit score. It encompasses 35 percent of the pie. Needless to say, paying your bills on time will not only benefit the company or your lender but will also improve your credit score. That said, missed or late payments will surely bring adverse effects to your credit score.
For the rest of the portion, 30% comes from the amount that you owe, 15% comes from your credit history, 10% comes from your credit mix, and 10% comes from your new credit.
What are the ways to improve credit score?
If you really want to score good credit loans, it is vital that you improve your credit score
first. To do so, the most important thing that you have to do is to pay your bills on time. Don’t wait for your extra money to go to unnecessary things. If you know, you can pay your debt ahead of time, then do it.
Other ways are starting to use your credit as early as possible, diversifying your credit, keeping credit utilization under 30%, and slowing down on new accounts.
It is not a surprise how a three-digit number can significantly affect your financial life. Knowing the ropes before you go into the actual borrowing will put you on an advantage. You will be less likely to become a victim of loan sharks and scammers.